Partners Tsegaye Laurendeau and Simon Fawell and Associate Alasdair Marshall have contributed a chapter in Financier Worldwide Magazine’s 2023 edition of Managing and Resolving Commercial Disputes.
Financier Worldwide’s Managing and Resolving Commercial Disputes 2023 edition was published on 28 April 2023 and the eBook can be purchased here.
The post-coronavirus (COVID-19) dealmaking boom has seen a marked increase in M&A disputes. While this may be a result of rushed due diligence to capitalise on discounted prices, difficulty in pricing targets in the post-COVID market, or buyer remorse amid growing macroeconomic concerns, the end result is the same – disputes centring on the terms of share purchase agreements (SPAs).
A common issue arising in these M&A disputes is the interaction of multiple regimes for dispute resolution within the same SPA. This may consist of, for example, provision for expert determination of a technical issue alongside a ‘catch all’ litigation or arbitration clause for all other disputes, or an issue ‘carved out’ for arbitration from a ‘catch all’ litigation clause. While parties hope these ‘multijurisdictional’ regimes will lead to more effective dispute resolution, the reality is complicated, and parties can find themselves in a more onerous process than if they had opted for arbitration or litigation alone.
Perceived benefits and reality of multijurisdictional dispute resolution regimes in M&A transactions
Multijurisdictional dispute resolution regimes can appeal to parties for their promise of quicker, more efficient and cheaper dispute resolution with a tailored mechanism for dealing with the different types of disputes that may arise; for example, expert determination for technical (usually accounting) issues, and court or arbitration for more legally based disputes.
Arbitration carve outs from ‘catch all’ litigation clauses also appear from time to time, in part due to the perception (particularly under English law) that arbitration tribunals, with the ability for the parties to deploy industry experts as arbitrators, are better suited to complete the parties’ agreement where they have left something to be negotiated at a later date but have ultimately been unable to reach agreement (so-called ‘agreements to agree’).
The appeal of having technical disputes on the numbers being resolved by a fast, cheap and expert-led resolution process without the procedural formality of the courts or arbitration is clear. The risk, however, is that the parties overlook the complexities of the types of disputes they might face and, in doing so, get into a procedural muddle of their own making because the jurisdictional scope of each resolution method and how they interact is insufficiently thought through at the time of contracting.
In the case of expert determination, often what the parties anticipated at the time they contracted would be a straightforward dispute on the numbers (for example capital calculations or accounting treatment to be applied) is, in fact, a dispute where the technical issue is entwined with a legal one: the technical issue cannot be resolved without first determining the correct interpretation of the contract. By way of illustration, an expert may well be able to interpret and form a view on a disputed dataset. However, the terms of the contract may be vague such that it is unclear what should and should not be included within that dataset.
The expert is generally not intended to be an individual who is legally trained and so is not necessarily well placed to determine matters of contractual interpretation. Grounds for challenge at a later stage may arise if the expert expressly or implicitly makes a legal determination. Otherwise, parties may first need to resort to the general dispute resolution provision (court or arbitration) to determine the meaning of the contract before then having to go to the expert for the ‘fast and cheap’ resolution of the technical dispute that remains. In the latter scenario, the back-and-forth process is inevitably expensive and impracticable.
Further issues can arise where the procedural and timeline specifications for expert determination set down in the SPA are insufficient, imprecise or inappropriate for the dispute in question. This can lead to the process becoming bogged down by disputes over the selection of the expert, whether (and if so, how much) disclosure should be given by the parties, among others. Parties on the wrong side of an expert determination will often use these disputes later as a means of challenging the expert’s determination on the basis of procedural unfairness. This might be because the expert determination provisions contained flawed specifications on the representations each party was entitled to make (or perhaps did not specify this at all), or because, at a more fundamental level, expert determination cannot guarantee due process or a full and final determination of a disputed issue.
Parties seeking to delay the process once a dispute has arisen may also employ ‘guerrilla tactics’, for example by commencing arbitration or litigation in parallel on related grounds to ‘torpedo’ the expert determination. Unlike an arbitral award or a court judgement, expert determination is merely a contractual process agreed to by the parties, with no res judicata effect. As a result, a court or tribunal is not bound to defer jurisdiction in the way it might under private international law rules to a parallel arbitration or litigation. The party seeking to pursue expert determination will, in these circumstances, have no guarantee that it will not need to relitigate the disputed issue – entirely or partially – before an arbitral tribunal or a court.
Similarly, a dissatisfied party may seek to frustrate the expert determination by refusing to abide by the expert’s findings. The expert’s findings only have force through the parties’ contractual agreement to follow the process. If a party refuses to follow that process, the other party’s remedy is for breach of contract which – once again – will require the parties to resort to the general dispute resolution clause in the SPA. In doing so, the dissatisfied party may raise arguments that the issue determined fell outside the expert’s remit, as well as questioning whether the court or tribunal can review the expert’s substantive findings and, if so, what level of scrutiny should be employed (i.e., whether the expert’s findings should be entirely or partially disregarded). In this respect, an arbitrator or judge will not necessarily be bound by the expert’s findings.
While less common, parties do sometimes also agree to a general court resolution clause with a provision for arbitration in respect of certain aspects of the agreement. The most common reason for this is that a line of English cases suggests that, where the parties have provided in their contract that they will negotiate some further aspect of their relationship (a typical form being ‘the parties shall negotiate in good faith to …’) that will be treated under English law as an ‘agreement to agree’, which an English court cannot enforce but an arbitration tribunal potentially can.
While the English courts’ position on ‘agreements to agree’ has softened in recent years, issue-specific arbitration clauses to ‘save’ potentially problematic ‘agreements to agree’ remain relatively prevalent. This type of split arrangement often causes problems on the scope of the arbitration tribunal’s jurisdiction. It is not uncommon to see English court rulings sending an issue to arbitration on the basis of competence-competence only for the tribunal’s award, once rendered, to be challenged back before the English court on the basis that the tribunal exceeded its jurisdiction.
The simplest way to deal with this is to agree at the time of contracting to submit all disputes to arbitration rather than carve out particular issues. Where there is a split jurisdiction provision, however, it is important to keep in mind the possibility of challenge when framing arguments to the tribunal to help ensure that any award deals effectively with the question of jurisdiction and does not leave the award open to challenge.
Minimising the issues faced by multijurisdictional dispute resolution
There is a case to be made that, save where an issue is truly narrow and discrete (i.e., is limited to strictly technical questions that do not involve any factual or legal considerations), multijurisdictional dispute resolution regimes should be foregone entirely. Arbitration, for instance, can be sufficiently flexible that the parties enjoy many of the benefits of (for example) expert determination, while avoiding the pitfalls of a multijurisdictional dispute resolution regime.
In particular, with a skilfully drafted arbitration clause, arbitration procedure can be expedited, and the parties left free to choose a single, expert arbitrator to govern the dispute if they so choose. In addition, an arbitral award is globally enforceable (usually under the New York Convention) and has res judicata effect, which means the issue cannot be reopened and deference must be paid to the arbitrator’s decision.
As the sole dispute resolution process with authority to direct the parties and resolve procedural complications, the arbitration would also be more resilient to disruption from a dissatisfied or obstructive party. However, if parties nevertheless consider a multijurisdictional dispute resolution regime to be the most appropriate for their SPA, there are steps, as outlined below, that can be taken at the drafting stage to make the process more effective.
First, the issues for expert determination should be carefully selected and precisely defined to avoid the expert being tasked with determining questions which turn, at least in part, on contentious issues of interpretation. A tight definition of the issues to be determined by an expert should also help to limit the prospect of challenges on the basis that the expert has exceeded their authority. To assist with this, parties should consider involving an expert with an accounting background at the SPA drafting stage when deciding which issues to submit to expert determination.
Second, the procedure and timeline for resolution should be expressly stipulated. In particular, parties should give detailed consideration at the time of contracting as to whether the expert should have the power to determine the procedure or, otherwise, the disclosure obligations on each side (parties often inadvertently include extremely onerous disclosure obligations), the number and length of written submissions and the extent to which oral submissions are permitted.
Thirdly, it is essential to have a workable process for appointing the expert. If the expert is agreed in advance, how will they be replaced if unable to act when a dispute arises? Where the expert is not agreed in advance, there should be the power for an independent body to appoint an expert if the parties are unable to agree following the advent of a dispute and it should be checked that the chosen body is, in fact, willing to appoint experts in those circumstances.
Finally, it should be made clear whether the ‘catch all’ dispute resolution regime (namely, the arbitral tribunal or the court) has authority to review the findings of the expert and, if so, to what degree.
Sylvie Gallage-Alwis and Nikita Yahouedeou discuss the DGCCRF’s recent practical guide to online shopping and consumer rights in Le Monde du Droit
28 November 2023
28 November 2023