How are disputes over a contested earn-out payment resolved?

An earn-out is the part of a business’s price that is paid only if the business meets a target after closing. A dispute may concern how the target was measured, or whether the buyer’s decisions after closing affected the result. How the dispute is resolved is a matter of contract first. Read the dispute clause in your purchase agreement before anything else, because it decides who hears the disagreement and by what process.

When the agreement requires arbitration

Ontario’s Arbitration Act, 1991 says an arbitration agreement may be an independent agreement or part of another agreement, such as a purchase agreement (s.5(1)). If a party starts a court proceeding on a matter that the agreement sends to arbitration, the court shall, on another party’s motion, stay the proceeding (s.7(1)), subject to the exceptions in s.7(2). The tribunal decides the dispute in accordance with law, including equity, and may order specific performance and injunctions (s.31). An award binds the parties unless it is set aside or varied (s.37). This is Ontario’s Act; if your agreement is governed by another province’s law, check that province’s statute.

When there is no arbitration clause

Without an arbitration clause, an unpaid earn-out is a claim for breach of contract that is pursued in court. Time limits matter. Ontario’s Limitations Act, 2002 sets a basic period of two years from the day the claim was discovered (s.4), unless the Act provides otherwise, and s.5 explains when a claim is discovered. Section 22 lets a business agreement vary or exclude that period in some cases, so check whether your purchase agreement does. A seller outside Ontario should check the limitation statute of the province whose law applies. Raise a disputed calculation in writing as soon as you see it.

Settle the mechanics before you sign

BDC notes that a seller who stays involved through an earn-out has an especially strong interest in a seamless transition, and it lists post-closing adjustments among the legal protections settled when the sale is negotiated. Before you sign, ask your lawyer to address:

• how the target is calculated, including which accounting policies apply and who prepares the figures
• which records you may inspect after closing, and how often
• what the buyer may not do that would depress the result, such as moving revenue to another business
• where a disagreement goes first, and whether that step is binding

If the target has already been missed, read what happens if an earn-out target is missed. To compare an earn-out with a fixed holdback, see earn-out vs holdback.