A European company (Respondent/Purchaser) entered into negotiations with two companies from Africa and the Americas (Claimants/Sellers, collectively referred to as Claimant), with a view to acquiring shares in a number of Claimants' subsidiaries which operated electricity generating plants in an Asian State (X). A due diligence was undertaken and eventually two share purchase agreements, governed by the law of the State of New York, were signed by the parties. As the power plant of one of the subsidiaries Respondent was to acquire was still under construction at the time of the agreement and this was likely to have an effect on the subsidiary's balance sheet, the parties negotiated a price adjustment mechanism in one of the share purchase agreements (No. 1) providing for the appointment of an independent auditor to make a price adjustment in accordance with an agreed formula. A dispute arose between the parties in relation to the treatment of certain fees under the price adjustment mechanism. In its first draft report, the auditor included those fees in both the cash on hand (COH) and the working capital (WCA), which led to a result in Respondent's favour. In a subsequent draft of the report it included them in the working capital only, which led to a result in Claimants' favour. In the final report, the auditor returned to its original position for part of the fees. Claimants complained that the auditor had made an error in its calculation of the cash on hand and consequently in the price adjustment. In a separate arbitration, which was joined to the first, Respondent claimed that Claimants had breached representations and warranties by failing to disclose material contracts and contract amendments.

Une société européenne (le défendeur/acheteur) avait engagé des négociations avec deux sociétés, l'une établie en Afrique et l'autre en Amérique (les demandeurs/vendeurs, collectivement désignés comme le demandeur), en vue d'acquérir une participation dans un certain nombre de filiales du demandeur qui exploitaient des centrales électriques dans un État asiatique (X). Un audit avait été effectué et deux conventions de cession d'actions régies par la loi de l'État de New York avaient été signées par les parties. Sachant que la centrale électrique de l'une des filiales que le défendeur devait acquérir étant encore en construction au moment de la signature et considérant que cela jouerait vraisemblablement sur le bilan de la filiale, les parties avaient négocié dans l'une des conventions de cession d'actions (n° 1) un mécanisme d'ajustement du prix prévoyant la nomination d'un auditeur indépendant chargé de procéder à l'ajustement selon une formule convenue. Un différend est survenu entre les parties à propos du traitement de certains frais dans le cadre du mécanisme d'ajustement du prix. Dans son premier projet de rapport, l'auditeur avait comptabilisé ces frais tant dans les liquidités que dans le fonds de roulement, ce qui aboutissait à un résultat favorable au défendeur. Dans une version ultérieure du projet, il ne les avait comptabilisés que dans le fonds de roulement, ce qui donnait un résultat favorable au demandeur. Dans son rapport final, l'auditeur était revenu à sa position initiale pour une partie des frais. Les demandeurs se plaignaient de ce que l'auditeur avait commis une erreur dans le calcul des liquidités et par conséquent dans l'ajustement du prix. Dans un arbitrage distinct, qui a été joint au premier, le défendeur soutenait que la non-divulgation par les demandeurs d'importants contrats et amendements contractuels constituait une violation de déclarations et garanties.

Una empresa europea (demandado/comprador) entabló negociaciones con dos empresas de África y América (demandantes/vendedores, colectivamente denominados «demandante») con vistas a comprar acciones en diversas filiales del demandante que explotaban centrales eléctricas en un Estado asiático (X). Se realizó una diligencia debida y finalmente las partes celebraron dos acuerdos de adquisición de acciones regidos por la ley del Estado de Nueva York. Dado que la central eléctrica de una de las filiales que el demandado tenía la intención de adquirir aún estaba en fase de construcción en el momento de la firma del acuerdo y que era probable que este hecho afectara el balance de la filial, las partes negociaron un mecanismo de ajuste de precios en uno de los acuerdos de adquisición de acciones (nº 1) que establecía la designación de un auditor independiente para hacer el ajuste de precios según una fórmula acordada. Entre las partes surgió una controversia relativa al tratamiento de ciertos gastos en el contexto del mecanismo de ajuste de precios. En su primer proyecto de informe, el auditor incluyó estos gastos tanto en el efectivo en caja como en el capital circulante, lo que condujo a un resultado a favor del demandado. En un proyecto de informe ulterior, el auditor incluyó dichos gastos únicamente en el capital circulante, lo que condujo a un resultado a favor de los demandantes. En el informe final, el auditor retomó su postura original para una parte de los gastos. Los demandantes se quejaron de que el auditor había cometido un error al calcular el efectivo en caja y, por consiguiente, el ajuste de precios. En un arbitraje separado, que se unió al primero, el demandado alegó que los demandantes habían infringido las declaraciones y garantías al no revelar contratos importantes y modificaciones de contratos.

'A. The price adjustment claim

. . . . . . . . .

6. The relevant issues

128. The inclusion of the $2,780,616.76 of development fees in COH in [the auditor]'s final report had the effect of reducing by that same amount the Price Adjustment [Respondent] was required to pay to [Claimant]. [Claimant] seeks to recover that amount in this arbitration, arguing that [the auditor]'s calculation of the Price Adjustment was mistaken in this respect and that the mistake is within the meaning of "manifest error" as used in Section 6.10.3 of the [No. 1] Agreement. [Respondent] argues, in brief, that [the auditor]'s final calculation of the development fees was not in error and that, in any event, if [the auditor] did commit an error it was not a "manifest error" as that term is used in the [No. 1] Agreement and defined by the applicable law. [Respondent] stresses that the Tribunal's task is limited to determining whether [the auditor] manifestly erred in applying the language of the [No. 1] Agreement in light of the documents and information provided to it.

129. In order to determine whether "manifest error" pursuant to Section 6.10.3 occurred in the price adjustment determination, we must first decide whether there has been an error in that determination and second, if there has been an error, whether that error is properly characterized as manifest.

7. Was there error in the price adjustment determination?

130. In deciding whether there is error in the price adjustment determination, the Tribunal believes that its touchstone must be the intention of the Parties as expressed in the [No. 1] Agreement, including its price adjustment provisions. This requires us to interpret the [No. 1] Agreement, and specifically the price adjustment provisions of that Agreement, according to the substantive law of the State of New York, which the Parties selected to govern the Agreement and its construction.

131. The basic relevant principle of contractual interpretation under New York law is that a court, or other adjudicator, should give effect to the intent of the parties as revealed by the language and structure of the contract as a whole.1 Other applicable principles include the principle that an agreement should be interpreted to avoid inconsistencies and to give meaning to all of its terms and provisions2 and that in construing contracts, greater weight should be given to specific and exact terms than to general language.3 Finally, when a contract is construed, it should be given a fair and reasonable interpretation consistent with its purpose.4

132. In determining whether the [auditor's final] calculation of the Price Adjustment was erroneous, it is useful to draw a distinction between the following two questions:

- Apart from the inclusion of the development fees within the category of WCA in the Price Adjustment Clause, was it an error for [the auditor] to treat them as COH?

- Assuming it would not ordinarily have been error to treat the development fees as COH within the meaning of the Price Adjustment Clause, was it an error to do so where the Price Adjustment Clause specifically called for their inclusion as a component of WCA?

133. We draw this distinction because [Claimant] argues both that (a), since the development fees were not loans or obligations of a loan nature, they were not eligible for consideration as a component of COH, and (b), that regardless of whether the development fees could ordinarily be considered as a component of COH, they were clearly more appropriately treated in the context of this Price Adjustment formula as components of WCA and should not be counted twice.

(i) Was it an error for [the auditor] to treat the development fees as a "loan" and therefore as Cash on Hand?

134. [Claimant] argues, in effect, that the development fees are not capable of inclusion within the category of loans (or obligations of a loan nature) and thus cannot appropriately be included as a component of COH. This is so, according to [Claimant], because the development fees do not meet the criteria of a loan under [State X] accounting standards, and, further, they are identified in the relevant balance sheets as "advances" rather than "loans".

135. Section 6.10.1 of the [No. 1] Agreement requires [the auditor] to conduct its audit for purposes of making the Price Adjustment in accordance with GAAP, which is defined in Article 1 of that agreement as "generally accepted accounting principles in [State X]" . . .

136. On the question of whether the development fees meet the criteria of a loan under [State X] accounting standards, the tribunal finds the evidence to be conflicting.

137. On the one hand, [Claimant]'s expert on [State X] accounting standards testified that the development fees lacked the usual indicia of a loan, such as interest terms, principal repayment terms, financial covenants and a written loan agreement . . . [Claimant] submits that in these circumstances, it was an error for [the auditor] to consider the development fees to be a "loan".

138. On the other hand, [Respondent]'s expert on [State X] accounting standards testified that there was some basis for [the auditor] to conclude that the development fees were "loans" in an intercompany context . . . [Respondent] principally cites evidence of an obligation to repay, in the form of invoices, among other things. Accordingly, [Respondent] submits that there was some basis for [the auditor], in its professional opinion, to classify the development fees as being of a loan nature and therefore including them in the COH component of the Price Adjustment formula.

139. The evidence presented on the definition of a "loan" according to [State X] accounting standards was not sufficiently clear to permit the Tribunal to conclude that treatment of the development fees as obligations of a loan nature was an error. This is particularly so in light of Section 6.10.3 of the [No. 1] Agreement which provides that "[t]he Independent Auditor shall be deemed to be acting as an expert and not as an arbitrator". In determining whether the development fees were of a loan nature, [the auditor] was exercising its professional judgment as an accounting firm within the scope of its expertise. The Tribunal is unable to conclude on the basis of the evidence provided that it was an error for [the auditor] to treat the development fees as liabilities of a loan nature simply on the basis of their categorization pursuant to [State X] accounting standards.

140. We turn to [Claimant]'s contention that the development fees could not be considered as obligations of a loan nature because they had been identified in the relevant balance sheets as "advances" rather than "loans".

141. We do not find that treatment of the development fees on the balance sheets as "advances" precluded their treatment as "loans" under the Price Adjustment clause. The Tribunal's review of the evidence indicates that the term "advance" was used rather loosely and that the classification of the development fees as "advances" was not logically inconsistent with their treatment as an obligation of a loan nature.5 The evidence indicated that there was an obligation on [the subsidiary] to repay the funds paid by [a Claimant group company] on its behalf and that they were not paid before they were due . . .

142. On this basis, we find that treatment of the development fees on the balance sheet as advances cannot be regarded as inconsistent with their treatment as obligations of a loan nature in a price adjustment calculation.

143. As a result, absent other contractual direction, [the auditor] could have decided that the development fees were of a "loan nature" and fell within the COH component. We conclude that it would not ordinarily have been an error to include the development fees within the COH component of the Price Adjustment clause simply on the basis of the definition of a loan under [State X] accounting standards or the manner in which they had been identified in [the subsidiary]'s financial statements.

(ii) Was it an error to treat the development fees as a component of COH where the Price Adjustment Clause specifically called for their inclusion as a component of WCA?

144. We now turn to the question of whether, assuming it would not ordinarily have been error to treat the development fees as a component of COH within the meaning of the Price Adjustment clause, it was error to do so where the Price Adjustment clause called for their inclusion as a component of WCA.

145. As discussed above, the WCA component of the Price Adjustment formula expressly includes the development fees and contains specific directions for how the development fees were to be accounted for, including how they were to be treated if they had been "contributed as capital to [the subsidiary]" at or prior to the Closing Date. The bulk of those fees were, as noted above, contributed as capital to [the subsidiary] prior to the Closing Date. [The auditor] followed these directions in calculating the WCA portion of the Price Adjustment.

146. In contrast, the COH component of the Price Adjustment formula does not specifically address the treatment of the development fees. While the COH component provides for the treatment of any retained liability of [the subsidiary] to repay any loan to seller and while the development fees could be seen as a form of "loan", the general language of the COH component of the Price Adjustment formula does not compel that conclusion. According to New York law, where the specific treatment of an obligation is explicitly provided for in one section of a contract and where a different treatment can at best be inferred from another section, the application of the specific direction should prevail over the contradictory general direction.6 The treatment of the development fees as loans under the COH component of the Price Adjustment formula resulted in a double counting or double treatment of those fees, which was not consistent with the purpose of the price adjustment provisions of the [No. 1] Agreement. Nor was it consistent with the intention of the Parties.

147. It was common ground between the Parties that the Price Adjustment mechanism was intended to adjust the purchase price to be paid under the [No. 1] Agreement to reflect changes in [the subsidiary]'s balance sheet which, due to the fact that [the subsidiary]'s power plant was still under construction at the time the Agreement was being negotiated, both Parties anticipated would occur . . . This is consistent with common commercial practice to include a price adjustment mechanism in purchase and sale agreements to recognize that the value of a business can change between the date of agreeing to terms and the closing of the transaction.

148. The purpose of the Price Adjustment mechanism was to accurately reflect changes in the value of [the subsidiary], the shares of which [Respondent] was purchasing from [Claimant]. It did not contemplate the double treatment of a balance sheet item in determining changes in that value. [Claimant]'s witnesses, its chief negotiator . . . and its transactional lawyer who negotiated the Agreement . . . both testified that double treatment or double counting of a balance sheet item would not have been consistent with the intention of the Price Adjustment. Consistent with this, the terms of the Price Adjustment formula itself indicate an intention to avoid double counting or overlapping between its various components.7

149. It was also the common expectation of the Parties that the development fees in question would be released or repaid before the IBSD [Interim Balance Sheet Date] and that they would not, therefore, be included in the Price Adjustment. This intention was also reflected in the [No. 1] Agreement in Section 4.11.

150. [Respondent] does not contest that the intention of the Parties in drafting the Price Adjustment was to accurately value the [subsidiary's] shares that it was buying from [Claimant] nor has it presented any evidence that it was the Parties' intention to double count a particular balance sheet item . . . Further, no evidence or argument supporting the double counting of a balance sheet item and, specifically, the development fees, in the calculation of the Price Adjustment has been advanced. Rather [Respondent]'s position is that the double counting of the development fees which eventually occurred was a foreseeable result of [Claimant]'s not having converted the development fees to capital prior to the IBSD . . . and [Claimant]'s error in nevertheless leaving the reference to the IBSD in the definition of COH.

151. There is no dispute between the Parties that $2,380,192 of the development fees were, in fact, contributed as capital to [the subsidiary] prior to the Closing Date and that, as a result, by the time of the Closing Date, only $400,424.76 was outstanding on account of the development fees and that such latter amount was properly included in the Price Adjustment (under WCA).

152. It is a basic principle of contract construction under New York law that "courts construing contracts must give 'specific terms and exact terms greater weight than general language'".8 It is also a "well settled rule of contract interpretation that an agreement should be interpreted to avoid inconsistencies and to give meaning to all of its terms and provisions".9

153. The WCA component of the Price Adjustment Formula contained specific directions for how the development fees were to be accounted for, including how they were to be treated if they had been "contributed as capital to [the subsidiary]" at or prior to the Closing Date . . . The bulk of those fees were, as noted above, contributed as capital to [the subsidiary] prior to the Closing Date. [The auditor] followed these directions in calculating the WCA portion of its Price Adjustment.

154. As noted earlier, the COH component of the Price Adjustment formula provides for the treatment of any "Retained Liability" of [the subsidiary] to repay any loan to Seller. While, as noted above, it could be argued that the development fees were effectively loans, the words of the contract do not require that application of its general language. Rather, where treatment of a specific obligation is explicitly provided for in one section of a contract, and where a different treatment can at best be inferred from another section, New York law requires the application of the specific direction, and not the contradictory general direction.

155. [Respondent] urges, in effect, that both directions should be applied. However, to do so, in the absence of clear evidence of an agreement or intent of the parties to count the same obligation twice, would do violence to another principle of contract construction under New York law, which requires us to "avoid construing an agreement in a manner that would effectively require double compensation or produce other unreasonable or unfair results."10 The [No. 1] Agreement unmistakeably requires the development fees to be counted as part of the WCA component of the Price Adjustment, and nothing in the text of that agreement requires the development fees to be counted twice. Further, double treatment of the development fees would not be consistent with the purpose of the Price Adjustment which was to accurately fix the purchase price by adjusting for changes in [the subsidiary]'s balance sheet. No argument or evidence was advanced to explain how double counting of the development fees under both COH and WCA was consistent with this purpose or otherwise in accordance with the common intention of the Parties.

156. Consistent with the Parties' intention that the Price Adjustment reflect the accurate value of [the subsidiary]'s shares without double counting balance sheet items, the provisions of the Price Adjustment mechanism, interpreted in accordance with New York law, reflect the intention that the development fees in dispute were to be dealt with as a component of WCA and not COH.

157. This conclusion is reinforced by the drafting history. While it appears that the Parties may originally have considered the development fees as a form of loan or "retained liability", for example in the definition of COH from Draft 14B of the [No. 1] Agreement through to Draft 23 and in their description of the development fees in Schedule 4.4 of that Agreement, the categorization or conversion of the development fees into loans does not appear to have been the final view of the Parties. They had, for example, also contemplated treating the fees and the obligation to repay them as an offshore service agreement in Schedule 4.3.

158. More important is what the Parties did after it had been confirmed that the IBSD had occurred. The parenthetical which referred to the development fees in Drafts 14B through 23 of the Agreement was deleted in Draft 24 . . . This occurred after [Respondent's counsel]'s email . . . in which [Respondent's counsel] requested deletion of the reference to "approximately $2.5 million" on the basis that the exact figure was unknown at the time. In the exchange of emails preceding [Respondent's counsel]'s request, the question of whether the IBSD had already occurred was also raised . . . and, on the following day, [Respondent's counsel] suggested that the IBSD had occurred [two weeks earlier]. This was, in fact, confirmed at a meeting between the Parties . . . The [earlier] date . . . was entered as the IBSD in the next draft of the [No. 1] Agreement, Draft 26. It was in that same draft that the definition of WCA was amended to include the specific direction with respect to the treatment of the development fees under that component of the Price Adjustment formula. [Claimant]'s transactional lawyer . . . testified that the deletion of the parenthetical in the definition of COH and the insertion of the specific reference to WCA was done consciously to avoid the possibility of double counting or double treatment of the development fees once the specific date of the IBSD had been confirmed . . . While the result could have been more gracefully and more clearly accomplished, if the COH and WCA definitions are read together to give more weight to the more specific provision and to avoid an inconsistency between the two, it will be seen that the effect of the final revisions was to transfer treatment of the development fees from the COH component to the WCA component.

159. As a result, the Tribunal concludes that the intention of the Parties with respect to the Price Adjustment was to create a mechanism to accurately reflect the value of the [subsidiary's] shares in the purchase price to be paid by [Respondent] to [Claimant]. This mechanism did not include the double treatment or double counting of development fees under both the COH and WCA components, but, rather, provided for their treatment under WCA only. Therefore, the final Price Adjustment calculated by [the auditor] was not consistent with the intention of the Parties as reflected in the [No. 1] Agreement and, more particularly, in its Price Adjustment formula.

160. In our view, it was an error for [the auditor] to treat the development fees as a loan where they had been converted to capital and already properly treated as components of WCA under the Price Adjustment formula. Since treating the development fees as an element of WCA was specifically called for and unquestionably correct, and because double counting of the development fees does not reflect the intention of the Parties, the fees cannot also be considered as correctly included in the calculation as components of COH.

161. This conclusion, which is not affected by [the auditor]'s role as an "expert" pursuant to Section 6.10.3 of the [No. 1] Agreement, is based on the Tribunal's interpretation of the price adjustment provisions in the context of the [No. 1] Agreement and pursuant to New York law. In order to conduct the Price Adjustment as required by Section 6.10 of the [No. 1] Agreement, [the auditor] was required not only to apply its accounting expertise, but also to interpret and apply the whole of the Price Adjustment formula in accordance with the intention of the Parties as expressed in the Agreement. While interpretation of the Agreement and its Price Adjustment formula may fall outside the strict scope of [the auditor]'s expertise as accounting experts, it is an integral part of the task [the auditor] was required to perform.

162. The history of [the auditor]'s treatment of the development fees supports the conclusion that it erred in including the $2,780,616.76 of development fees in the COH component of its final Price Adjustment. In its first report . . . [the auditor] included both components of the development fees in COH. In its second . . . and third . . . draft reports, [the auditor] continued to include all of the development fees in COH, but signalled a concern with the logic of doing so by including a note in its third draft report pointing out that most of the amount in question had been settled [previously], and that taking that transaction into account would swing the Price Adjustment from a positive $2,618.005.34 (in [Respondent]'s favour) to a negative $3,862,473.35 (in [Claimant]'s favour) . . . While it appears that there may have been some discussion between [the auditor] and [a Claimant executive] prior to the preparation of Draft 3 of [the auditor]'s report, there was no evidence that the added note was the result of discussions with, or at the prompting of, [the Claimant executive] or [Claimant].11

163. In its fourth draft, [the auditor] excluded the development fees from its calculation of COH and inserted the explanation that this had been done on the basis of the interpretation of the legal advisor to the Seller. [Respondent] dismissed [the auditor]'s fourth draft as the result of intervention by [Claimant] . . . We are not persuaded by [Respondent]'s argument. The persons who communicated with [the auditor] about its draft reports were, at the time, still employees of the Target Companies . . . and would, presumably, still have hoped to continue their positions, or similar ones, under [Respondent]'s ownership. In any event, [the auditor] accepted the "legal interpretation" that the retained liability should only include liability of a "loan" nature and invited the Buyer to supply its own legal opinion. After its meeting with Messrs . . . of [Respondent], and two lawyers representing [Respondent], [the auditor] partially reversed its view of the appropriate treatment of the development fees.

164. In addition to the lack of certainty on [the auditor]'s part evidenced by the varying positions in its draft reports, the treatment of the development fees in the final report does not inspire confidence. For reasons it did not explain, [the auditor] chose in its final report to include the $2,780,616.76 of development fees in COH, but to exclude the other $4,100,286.69 that was contributed to capital [at an earlier date].

165. We conclude that, while it was possible, as a general question considered in isolation, to treat the development fees as loans or obligations of a loan nature, and include them within the category of COH, it was an error to do so when those fees are also included in another component of the price adjustment provisions and those provisions are interpreted in accordance with New York law as described above.

8. Was the error a "manifest error"?

166. Having concluded that there was an error in the Price Adjustment, we now turn to whether the error is susceptible to correction in this arbitration. The Parties agreed that the decision of [the auditor] as to the Price Adjustment was to be "final and binding upon the Parties upon the delivery to them of the Independent Auditor's written determination of the Price adjustment, except in the event of fraud or manifest error". Fraud is not alleged. The question that confronts us is whether a manifest error, as opposed to a mere error, was committed.

167. For the reasons set out in the balance of this section, the majority of the Tribunal has concluded that a manifest error did occur. . . .

168. While the [No. 1] Agreement does not define the term "manifest error", Section 6.10.3 of the Agreement indicates that the Parties did not intend the standard of "manifest disregard of the law", which is applied by courts in reviewing the awards of arbitrators, both under New York law and under US Federal law, to apply.12 Therefore, in the absence of submissions that some other standard of "judicial review" applies, we must interpret the term "manifest error" as a standard created by contract.

169. In the majority's view, the term "manifest error" should be given its plain and ordinary meaning of an error that is clear or obvious.13

170. New York law is of limited assistance in interpreting "manifest error".14 A helpful decision, although based on Texas law, is Bank One, Texas, N.A. v. Federal Deposit Insurance Corp. 15 In that case, the defendant argued by counterclaim that the plaintiff had breached the agreement by failing to correct an allegedly erroneous balance sheet, in violation of the provision according to which the plaintiff was to repay the defendant where an adjustment was required "to correct manifest error [or] omission". The court found that the purpose of the quoted section was to protect the parties against unfairness in the calculation that might arise from the haste with which the calculation had to be done; the provision "safeguarded the parties by providing a narrow exception to the general agreement that the . . . Balance Sheet was not subject to further adjustment."

171. In defining the contractual term "manifest error," the Bank One court relied on Black's Law Dictionary:

Black's Law Dictionary defines "manifest" as "evident to the senses, especially to the sight, obvious to the understanding, evident to the mind, not obscure or hidden, and . . . synonymous with open, clear, visible, unmistakable, indubitable, indisputable, evident and self-evident".

The court concluded that "under these definitions, a 'manifest error' is an obvious mistake or departure from the truth".16

172. The majority concludes that when Section 6.10.3 of the [No. 1] Agreement makes the Independent Auditor's written determination of the Price Adjustment final and binding upon the Parties, "except in the event of . . . manifest error", the Party seeking to set aside that determination must demonstrate that the determination is not only erroneous but obviously or clearly so. Further, the error must be material in that it affects the outcome of the determination. That is, for our purposes, a manifest error is one that is both obvious or readily apparent and that has a material impact on the determination.17 We turn now to the application of that standard.

173. [Claimant] says that the relevant question is whether the result [the auditor] reached in applying the Price Adjustment mechanism was obviously incorrect. [Claimant] argues that Section 6.10.3 does not require that the Independent Auditor be the culprit in committing manifest error but, rather, only that manifest error exists. As an example, [Claimant] says that if [the subsidiary] had negligently supplied [the auditor] with inaccurate information from which to calculate the Price Adjustment, [the auditor] itself may not have committed an error, but the result could constitute manifest error. In [Claimant]'s submission, the relevant question is whether the result achieved was obviously or manifestly incorrect. [Claimant] goes on to argue that the correct interpretation of the price adjustment provisions pursuant to New York law demonstrates that the result achieved by [the auditor] constitutes manifest error. [Claimant] also argues that, in any event, the evidence at the hearing revealed that [the auditor] misconstrued the Price Adjustment mechanism and, as a result, committed a manifest error in its calculation.

174. [Respondent], on the other hand, says that in order to overturn [the auditor]'s calculation of the Price Adjustment, [Claimant] must prove that first, [the auditor]'s calculation was in error and second, that the error was manifest, meaning obvious or blatant. [Respondent] says that even if [Claimant]'s submissions were accepted in all respects, they would tend to prove only that [the auditor] had made an error.

175. [Respondent] argues that [the auditor] was correct in its application of the Price Adjustment formula. However, it goes on to state that even if the Tribunal were to conclude that [the auditor] did not properly apply the price adjustment mechanism in the circumstances, it could not have been "obvious" to [the auditor] that it was in error and, therefore, [the auditor] could not have manifestly erred. In this regard, [Respondent] says that [the auditor] had to exercise judgment as to how to characterize the development fees and, since those fees were undeniably owed back to [Claimant], it could not have been "obvious" to [the auditor] that the development fees were not of a loan nature. [Respondent] says that if the Tribunal were to find that, in all the circumstances, [the auditor] should reasonably have come to the conclusion that the development fees were not of a loan nature, such a finding, without more, does not mean that [the auditor] manifestly erred. Similarly, if the Tribunal were to find that [the auditor] should have decided that the development fees were not addressed in the COH component of the Price Adjustment formula because they were addressed in the WCA component, this would not mean that [the auditor] had erred manifestly in continuing to treat the development fees under both components.

176. According to [Respondent], since the Price Adjustment formula does not say that a balance sheet item cannot be addressed in two different components and since the COH and WCA components treat the development fees differently (the first by reference to the IBSD and the second by reference to the Closing Date), it could not have been "obvious" that the development fees should not be treated under the COH component as well as the WCA component. [Respondent] says that if the Price Adjustment mechanism provided, implicitly or explicitly, for the development fees to be treated in both the COH component, as of the IBSD, and the WCA component, as of the Closing Date, that was the Parties' choice and the Tribunal's sole task is to determine whether [the auditor] manifestly erred in applying the language presented to it.

177. The relevant question is whether [the auditor] committed a manifest error in its interpretation and application of the Price Adjustment formula in the [No. 1] Agreement. While we agree with [Claimant] that, pursuant to Section 6.10.3, a manifest error could occur as the result of factors such as the negligent supply of inaccurate information, for which [the auditor] was not the direct culprit, this is not at issue in this case. No allegation was made that [the auditor] was provided with inaccurate information or, indeed, that it made any error of calculation. Further, there was no challenge of the amount at issue.

178. In view of our conclusion that [the auditor] committed an error in its application of the Price Adjustment formula, the sole remaining issue is whether that error was manifest pursuant to the terms of Section 6.10.3 of the [No. 1] Agreement. In this regard, [Respondent] argues that if [the auditor] did not properly apply the Price Adjustment formula, it could not have been obvious to [the auditor] that it was an error and, therefore, [the auditor] cannot have erred manifestly. However, we are unable to accept that in order to constitute a "manifest" error under Section 6.10.3 of the Agreement, the error must have been obvious or manifest to [the auditor]. Rather, the appreciation of the manifest nature of the error is for this Tribunal. Presumably, if the error had been obvious to [the auditor], it would have avoided or corrected it.

179. As discussed above, in conducting the Price Adjustment, [the auditor] was required both to exercise its accounting expertise and to interpret the Price Adjustment formula and related provisions of the Agreement. [The auditor] was aware that it was not conducting a pure accounting exercise. Indeed, once [the auditor] become [sic] aware that there may have been differing interpretations of the Price Adjustment formula and its application, it invited the "legal interpretation" of [Respondent].18 Although there may have been some ambiguity in the Price Adjustment formula which permitted [the auditor] to initially consider the placement of the development fees in the COH component, this was contradicted by the specific treatment of the development fees in WCA which reflected the intention of the Parties to deal with the fees in that component of the Price Adjustment formula. There was no indication that it was the intention of the Parties to count the development fees twice or to impose a penalty on the vendor, or to give a windfall to the purchaser, by counting the fees twice. As we have already concluded, it was an error on [the auditor]'s part to count the development fees both as part of COH and of WCA.

180. We note that [the auditor] was aware that it was counting the development fees twice, as evidenced by its varying treatment of those fees and its expression of concern in notes in its draft reports . . . In our view, this reflects some awareness by [the auditor] that it was departing from what would normally be expected in a price adjustment exercise. In these circumstances, and in light of the specific treatment of the development fees under the WCA component (discussed above) and the absence of any clear indication that the Parties did intend to count the development fees twice, [the auditor] should, at a minimum, have gone back to examine the Parties' intent underlying the Price Adjustment formula.

181. In the majority's view, [the auditor]'s error constitutes a "manifest" error for the purposes of Section 6.10.3 of the Agreement. Once the intention of the Parties is identified, the error in interpreting and applying the Price Adjustment provisions of the Agreement is readily apparent or obvious. The Tribunal has found that the purpose of the Price Adjustment formula was to determine the accurate value of the shares to be sold and that there was no intention to double count the development fees. Yet, this is precisely what [the auditor] did in its application of the Price Adjustment formula. While the interpretation of the Price Adjustment formula required some analysis and the application of New York law, [the auditor]'s error is nonetheless clear or obvious. [The auditor]'s interpretation of the Price Adjustment formula and the result it reached are clearly contrary to the intention of the Parties to accurately value the shares of [the subsidiary]. It was never the intention of the Parties to penalize [Claimant], or to provide a windfall to [Respondent], in the event that the development fees were not forgiven or converted to equity after the IBSD, but before the Closing Date. To hold otherwise would do violence to the intention of the Parties as expressed in the Agreement and their reasonable commercial expectations. In the majority's view, this double counting of the development fees in the circumstances of this case constitutes a readily apparent and material error that is sufficient to meet the "manifest error" standard in Section 6.10.3 of the Agreement.

182. The majority concludes that the error committed by [the auditor] in applying the Price Adjustment formula is a manifest error within the meaning of Section 6.10.3 of the [No. 1] Agreement. Therefore, the Price Adjustment as calculated by [the auditor] is not final and binding upon the Parties.

183. As a result, [Claimant] is entitled to recover the additional amount that the proper application of the Price Adjustment would have generated had the development fees not been incorrectly included under the COH component. . . .

. . . . . . . . .

C. The material contracts claims

270. [Respondent] asserts a series of claims for alleged breaches by [Claimant] of its warranties and representations under the [No. 2] Agreement that all material contracts of the companies and subsidiaries of companies sold pursuant to those agreements had been disclosed to [Respondent].19 . . .

271. Section 4.4 of the [No. 2] Agreement contained a warranty and representation by [Claimant] that "The Contracts listed in Schedule 4.4 include all of the Material Contracts" (the "Material Contracts Warranty"). A "Material Contract" is defined in the [No. 2] Agreement as "any Contract to which any of the Company or its Subsidiaries is a party . . . which satisfies the definition of 'material' above." "Material" is defined in the same agreement, with respect to a contract, as one that "has a net impact on the business, assets, conditions (financial or otherwise) or results of operation of the Company and its Subsidiaries, taken as a whole, equal to or in excess of $480,000." . . .

272. [Claimant]'s representations with respect to subsidiaries [subject of the No. 2 Agreement] were "made subject to the knowledge of the Seller", and were also subject to a waiver by the Buyer of any breach of which the Buyer had knowledge prior to the date of the agreement . . . "Knowledge" is defined at some length in the [No. 2] Agreement . . .

273. [Claimant] undertook in Section 11.2.2 of the [No. 2] Agreement to indemnify and hold [Respondent] harmless against all losses arising or resulting from the untruth or inaccuracy of the representations or warranties of Seller in, among other provisions, Section 4.4 . . . That indemnity was subject to an overall limitation in Section 11.2.2 that [Respondent] could not make any claim for a breach of the warranties and representations under Section 11.2.1 unless [Respondent]'s losses in the aggregate under that section exceeded $10 million . . . Section 11.2 provides as follows:

Section 11.2 Indemnification

11.2.1 Subject to Section 11.1 and 11.2.2, Seller and [Claimant 2] shall, jointly and severally, indemnify, defend and hold harmless Buyer against and in respect of all Losses arising or resulting from the untruth or inaccuracy of the representations or warranties of Seller in Sections 3.6, 4.2, 4.4 and 4.12.

11.2.2 Seller and [Claimant 2] shall have no liability for, and shall not be required to indemnify, defend and hold Buyer harmless with respect to any Loss suffered or incurred by Buyer, unless and until such Loss, together with the aggregate of all other Losses arising under Section 11.2.1 shall exceed $10 million in the aggregate; at which time Seller and [Claimant 2] shall be liable for all Losses, including Losses below the foregoing threshold…

274. Therefore, an obligation under the [No. 2] Agreement for [Claimant] to indemnify [Respondent] arises only if [Claimant] has breached the Material Contracts Warranty and [Respondent]'s resulting losses exceed $10 million in the aggregate. In order for the Tribunal to find a breach of the Material Contracts Warranty, the agreement must have been a contract; it must have been material (that is, it must have had a net impact of $480,000 or more); [Claimant] must have had knowledge of the contract; and [Claimant] must have failed to disclose the contract. In order for the Tribunal to order [Claimant] to indemnify [Respondent] for any such breaches, [Respondent] must prove that its losses exceeded $10 million in the aggregate. Each of the six agreements or amendments which [Claimant] is alleged to have failed to disclose is discussed below.

. . . . . . . . .

3. Undisclosed reduction of contracted capacity in [A] and [B] Supply Agreements

. . . . . . . . .

330. With respect to the discount rate, [Respondent] argued that New York courts have used two approaches to the selection of an appropriate discount rate for future net revenue stream losses resulting from a breach of contract; namely "a safe and ascertainable rate of return available for the investment of an injured party's financial recovery" and the interest payable on an "alternative investment" with "characteristics as close as possible to the original investment". . . . [Respondent] relies on two cases for these approaches: Binghamton Masonic Temple, Inc. v. City of Binghamton20 and Teachers Ins. & Annuity Assoc. of America v. Ormesa Geothermal. 21

331. In Binghamton, the Plaintiff brought an action against the City of Binghamton for the city's anticipatory breach of an agreement to loan money to the Plaintiff for a renovation project. The court held that the appropriate discount rate to be used in determining the present value of the damages was the interest rate payable on US Treasury Bills for the comparable time period over which the future damages would be incurred for the breach of the agreement to loan money. In arriving at this discount rate, the court reasoned that the T-Bill rate was appropriate because it represented a safe and ascertainable rate of return available for the investment of an injured party's financial recovery.22

332. In Teachers, the Plaintiff, an institutional lender, brought an action against a prospective borrower for the breach of a commitment letter. The court held that the appropriate discount rate to use in arriving at the net present value of the damages was the interest rate assumed for the alternate investment of corporate obligations of maturity and average life similar to that set forth in the breached agreement.23 In arriving at this conclusion, the court rejected the argument that the discount rate should impute minimal credit risk to the alternative investment. The court held that imputing minimal credit risk would be inappropriate when sophisticated investors were the ones claiming the damages for breach of contract and it factored in an element of risk by assuming the interest rate for the "alternate" investment.

333. [Respondent] argues that these two cases support its position that the appropriate discount rate to be used is one based on the midpoint of the Belgian government bond rate and the average yield on long-term corporate bonds in [State X], as it represents a compromise between the safe rate of return standard in Binghamton and the alternative investment with analogous characteristics standard in Teachers.

334. The Tribunal notes that both of the cases cited by [Respondent] deal with situations where the contracts breached were contracts to lend or borrow money. In those situations, the use of a bond rate as the discount rate reflects the underlying risk associated with the investment, i.e. the cost of borrowing or cost of debt financing.

335. The Tribunal agrees that, according to New York law, the legal test to apply in determining the appropriate discount rate is the alternative investment with analogous characteristics standard. Because the Parties in this case are sophisticated, it would be inappropriate to impute minimal risk to the lost cash flows. Furthermore, the cash flows in issue in this arbitration are cash flows generated from the use of assets to provide services to customers. These cash flows are characteristically different from cash flows that represent a loan or borrowing. In these circumstances, the Tribunal finds that an alternative investment with analogous characteristics would be one that was financed by both debt and equity. It follows that the appropriate discount rate would be one arrived at through the weighted average cost of capital approach. The use of the WACC [weighted average cost of capital] approach . . . would reduce [Respondent]'s claim in regard of the [A] and [B] contracted capacity below the materiality threshold . . .

336. However, it is not necessary for us to resolve the materiality issue finally (much less the issues of knowledge by [Claimant] or waiver by [Respondent]) with regard either to Amendment No. 1 to the [A] Power Supply Agreement or Amendment No. 2 to the [B] Supply Agreement. As shown below . . . once the Tribunal excludes from consideration the [C] Claim, which the Tribunal has disallowed, [Respondent]'s total claimed loss does not exceed the $10 million aggregate threshold contained in Section 11.2.2 of the [No. 2] Agreement.

337. Accordingly, [Claimant] is not obligated, pursuant to Section 11.2.1 of the [No. 2] Agreement, to indemnify [Respondent] for any losses caused by the nondisclosure of Amendment No. 1 to the [A] Power Supply Agreement or by the nondisclosure of Amendment No. 2 to the [B] Power Supply Agreement.'

1
Reda v. Eastman Kodak Co. , 233 A.D. (2d) 914, 649 N.Y.S. (2d) 555, 556.

2
Mir v. Mir, 522 N.Y.S. (2d) 590, 591; Reda v. Eastman Kodak Co. , 233 A.D. (2d) 914, 649 N.Y.S. (2d) 557.

3
County of Suffolk v. Alcorn, 266 F (3d) 131, 139 (2d. Cir. 2001).

4
Cromwell Towers Redevelopment Co. v. Yonkers, 41 N.Y. (2d) 1, 6 (1976).

5
For example, according to the Encyclopedia of Banking & Finance (ed. Charles J. Woelfel, 10th ed. 1994), the term "advance" has multiple meanings, among which the first is as follows: "In general, a loan, although an advance may be on open account as well as being evidenced by a note, with or without collateral." Also: "A payment on account or before a contract is completed or legally due", and "Advance on wages or salaries refers to the privilege of employees of drawing before actual work performance".

6
See the authorities cited at § 131 above.

7
Further, parentheticals in the definition of WCA exclude from parts of that definition "amounts that constitute Construction Expenditures to the extent such amounts have otherwise been accounted for in the calculation of the Price Adjustment" and "all cash on hand".

8
County of Suffolk v. Alcorn, 266 F. 3d 131, 139 (2d Cir. 2001).

9
Mir v. Mir, 522 N.Y.S. 2d 590, 591 (2d Dep't 1987).

10
Barrow v. Lawrence United Corp. , 146 A.D.2d 15, 20, 538 N.Y.S.2d 363, 367 (3d Dep't 1989).

11
. . . The Tribunal notes that there were a number of changes between the second draft . . . and the third (draft) . . ., including changes in the calculation of CE (construction expenses) and WCA.

12
The [No. 1] Agreement clearly states that "the Independent Auditor shall be deemed to be acting as an expert and not as an arbitrator".

13
The New Shorter Oxford English Dictionary (Clarendon Press, Oxford, 1993) defines "manifest" as "clearly revealed to the eye, mind or judgment; open to view of comprehension; obvious"; the Oxford Desk Dictionary (Laurence Rudang, ed., 1st ed., 1995) defines "manifest" as "clear or obvious"; the Random House College Dictionary, revised edition, defines "manifest" as "readily perceived by the eye or the understanding; evident; obvious; apparent; plain;".

14
See B&B No. 5, 70 F. Supp. 578, 585 (EDNY, 1947) where the court stated that "more than an allegation" is necessary to expose a manifest error. Frankel v. ICD Holdings, 930 F. Supp. 54 (SDNY, 1996), involved a purchase agreement providing that the ultimate purchase price would be subject to a final adjustment determined by reference to the balance sheet, to be prepared by an accountant, Eisner, after closing. The balance sheet was to "be binding on the parties absent manifest error". In an action on notes given in connection with the purchase, the court did not directly construe the term "manifest error", but commented in ruling on a request for discovery that: "If Eisner did not properly prepare the balance sheet and it is materially wrong, the guarantors may avoid their guarantees irrespective of whether the inaccuracy was the product of negligence or deliberate fraud". That comment suggests that the court considered manifest error to be equivalent to "not properly prepare[d]" and "materially wrong". The Court did not directly address the meaning of "manifest" error and therefore the decision is of little assistance on this point. However, we find the second criterion of "materiality" of relevance in this case.

15
16 F.Supp. 2d 698 (N.D. Tex. 1998).

16
Ibid at 713.

17
See the Court's reference to the issue of materiality in footnote 100.

18
. . . [The auditor] received the "legal interpretation" of the "Seller" from [Respondent executives] in a telephone discussion with them and based its calculation of COH in the fourth draft of the Price Adjustment on this interpretation. In its note explaining this, [the auditor] suggested that the "Buyer may require its legal opinion to support this interpretation" upon which the revised calculation of COH was based.

19
[Respondent] withdrew its sole remaining claim under the [No. 1] Agreement in its Reply Memorial on Its Claims and, therefore, all claims fell under the [No. 2] Agreement.

20
602 N.Y.S. 2d 310 (Sup. Ct. 1993) [hereinafter Binghamton]

21
791 F. Supp. 401, 416 (S.D.N.Y. 1991) [hereinafter Teachers].

22
Binghamton, supra note 265 at 313.

23
Teachers , supra note 266 at 417.