In Wayne v. Chopivsky, 657 F. Supp. 788 (E.D. Pa.), aff'd, 835 F.2d 285 (3d Cir. 1987), the United States District Court for the Eastern District of Pennsylvania considered a contract provision similar to the one here. In that case, there was a contract between the plaintiffs, employees of a psychiatric hospital, and the defendants, the owners of the hospital. Id. at 789.
The contract provided that, if the net earnings of the hospital exceeded $ 1,500,000, the plaintiffs would be paid a sum of money. Id.
Pursuant to the contract, the company's earnings "shall be the audited earnings of the hospital as determined by the hospital's outside auditors (whose determination shall be final), calculated in accordance with generally accepted accounting principles . . . ." Id. at 789.
The outside auditors determined that the net earnings exceeded $ 1,500,000, but the defendants were not satisfied that the calculation of earnings was done properly. Id.
When the defendants refused to pay, the plaintiffs filed suit, contending that "the auditor's calculations were final and binding." They claimed that "the finality language was deliberately included to avoid a future dispute as to whether the earnings target was met." Id. at 790.
The defense argued, similar to Gebhardt & Smith's argument here, that the plaintiffs were not entitled to payment because the auditor's calculation was not in accordance with the agreement. Id.
The United States District Court found that the agreement was "clear and unambiguous," and that the "plain meaning" of the contract was that the auditor's determination was a binding determination. Id. at 793.
The court stated:
The purpose of a provision requiring a third party's opinion to be final and binding, as in this case, is to avoid the work required by litigation. The parties choose to forego the benefits and costs of presenting arguments and evidence from their own perspective and instead rely on an impartial third party to independently evaluate the evidence and make his own determination. Once the parties have done this, as long as the third party's opinion is an objective one, made in good faith, it is deemed to be what the parties bargained for and is binding. Id. at 792-93.
Because the defendants had not alleged bad faith, the court granted summary judgment in favor of the plaintiffs. Id.