Author: Alexander Grimm*
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The volume and number of M&A transactions is at a relatively low level at the moment given the global economic background that started in 2022 and still has not recovered. But better times are likely ahead at some point. Despite fewer and potentially smaller deals, the number of post-deal disputes is expected to increase.
Post-M&A disputes are common given the manifold risk elements that exist after a deal has closed. While the interests between the parties may (or should) have been aligned when the contract was signed, their interests are in many ways opposed in later stages. Yet, many of these disputes are solved via settlement. This is arguably the best method to avoid lengthy skirmishes even many years after the deal was closed. But a settlement is not always possible, and a formal dispute may ultimately be inevitable to preserve a party’s interests. These disputes can be lengthy and expose the parties to post-deal risks longer than they may have intended. Protracted legal disputes in and outside a court or arbitral proceeding can be more than just a nuisance as they bind valuable internal resources and can become expensive.
There are many factors contributing to these overlong disputes. A main factor is certainly the sales and purchase agreement (SPA) that usually includes price adaptation clauses, representations and warranties, indemnity clauses, earnout clauses, etc., and all these clauses may contain ambiguities that can instigate a dispute. There is no “perfect” SPA although the drafters aim to avoid ambiguities as much as possible. It would sweep too broadly to discuss the substance of these clauses here, and their scope and content obviously also depend substantially on the specifics of the deal. This article rather aims to outline a few important aspects that, from a procedural perspective, can prolong a dispute, and to offer some practice tips on how to limit these risks.
Indemnity Claims and Statute of Limitations
Indemnity clauses are routine in SPAs. They usually cannot be avoided given that the parties know that there will (likely) be future claims stemming from facts before the deal, such as ongoing litigations, potential customer or supplier claims, etc. The buyer usually wants to ensure that the seller bears the financial risks of these known (potential) claims. And these risks can very well extend for years after closing, for instance because an ongoing litigation appears unending. From a procedural perspective, there are two ways that may help reduce the risks of potential indemnity claims looming for too long.
First, indemnity clauses should clearly spell out what documents need to be provided when making a claim. This avoids a lengthy back-and-forth between the parties on what documentation is required. It may also take significant time to then obtain these documents once requested by a party (which is usually the seller as the obligor).
Second, it is advisable to carefully draft the contractual statute of limitations. The law otherwise governing statute of limitations may not be favourable to avoiding disputes long in the post-deal future. In addition, it may not even be simple to identify the applicable law in cross-border disputes, at least if statute of limitations is not qualified as a substantive issue (in which case the substantive law of the SPA would apply), but rather as a procedural one, which then causes particular issues in arbitration proceedings. Most notably, if the applicable law states that the limitations period only starts running after the buyer became aware of the claim, this would usually significantly extend the period in which an indemnity claim could be made: an indemnity may be triggered some years after closing and then the limitation period would come on top. Another factor is that the local statute of limitations rules may be a source of uncertainty, for instance it may be uncertain when the buyer became aware of a claim and thus when the limitations period starts running. It is therefore advisable to draft specific statute of limitations rules in the SPA.
The most effective option for such a clause is to fix specific time periods for making indemnity claims, for instance three years from closing. The buyer, however, may not want to agree to such strict limitations, particularly if he expects that an underlying risk may extend beyond that period. An alternative is to tie the limitations period to the date when the buyer has received the documents that form the basis for the indemnity claim (for instance invoices from customers, suppliers, or counsel). This underlines the first point above that the buyer should have a duty to furnish such documents with their indemnity claim. This would also allow implementation of much shorter limitations periods, for instance 6 months after the documents were received, since the buyer usually has no compelling interest to wait long before a known claim is made.
Coordination Between Different Dispute Settlement Mechanisms: Expert Determination vs Arbitration
An SPA oftentimes contains two separate dispute resolution clauses: an arbitration clause (or potentially a forum selection clause) and an expert determination clause. The arbitration clause usually sits at the end of the SPA and is meant to cover “all disputes arising out of or in connection with the contract”. In contrast, the expert determination clause is commonly situated in the body of the SPA and is meant to cover only a specific factual dispute that is usually contentious between the parties, most notably the adjustment of the purchase price after closing. Although there is an obvious overlap in the scope of these two clauses, many SPAs do not contain a specific provision coordinating these two mechanisms. That can become a source for opposing views and arguments, which in turn prolong any dispute between the parties. A clause in the SPA coordinating these proceedings may therefore consider the factors addressed below:
Before an arbitration is pending, there is obviously no immediate need to coordinate the two proceedings. However, the issue is that SPAs regularly do not contain specific rules on the expert procedures, the scope of the expert’s mandate (most importantly, whether the expert should be allowed to rule on specific legal questions associated with the determination of the facts), and the extent of any review of the expert determination by a court or tribunal (if any). While it may not seem right to discuss these presumably nitty‑gritty details when negotiating the deal, they are in fact crucial for the expert procedure to work in practice. Without specific rules, these proceedings work effectively only if both parties’ interests are aligned in coming to a determination by the expert. It is otherwise relatively simple for one party to derail or at least prolong the process. It is thus advisable to regulate the expert procedure as much as possible in the SPA. At the very least, the drafters should consider referencing rules for expert proceedings that some renown arbitration institutions offer (e.g., ICC Rules for the Administration of Expert Proceedings, the DIS Rules on Expert Determination, or the WIPO Expert Determination Rules). The deal team should seek guidance from dispute resolution specialists when formulating the expert determination clause.
Once an arbitration is pending, the two dispute resolution mechanisms stand in conflict to each other, and in want of a specific rule in the SPA, generally speaking, a tribunal may find on this issue somewhere on a scale between integration and segregation. Integration is an approach where the tribunal assumes its jurisdiction to also cover the issues that could go to an expert, particularly if an expert procedure has not yet commenced. A tribunal is well-equipped to deal with difficult factual determinations, based on party submissions and expert reports, or, as the case may be, via a tribunal-appointed expert. This is particularly useful if the issues for the expert are intertwined with claims brought in the arbitration. One additional consideration when drafting the arbitration clause in the SPA is that for very technical issues (such as financial evaluations or tax law-related issues), the parties may also agree that the tribunal can avail itself of an “expert on standby”. This concept (sometimes also referred to as a “consultant expert” or “technical advisor”) is currently vividly debated (for instance at GAR Live Damages in January 2024). This option has also been discussed recently by UNCITRAL Working Group II, which may propose a “model clause on technical advisors” (earlier referenced as “experts accompanying the tribunal”). While this model clause is meant to target technology-related disputes, there is no hindrance in also adopting it for other kinds of disputes. Given that it is a relatively new concept, the arbitration clause, or later the procedural rules, need to be drafted with care and the arbitral tribunal should be open to engage in such a process while being skilful in dealing with potential practical pitfalls. In any event, an arbitration clause containing such an option would probably also increase the chances that a tribunal would exercise an integration-driven approach even in absence of a separate rule in the SPA coordinating the expert and arbitration proceedings.
However, there is a serious risk that the tribunal will opt for a segregation of the two dispute resolution mechanisms and thus declare that it has no jurisdiction to rule on the issues left for the expert. Even if that may appear appealing at first for isolated factual determinations that have no bearing on the claims brought in the arbitration, it may become complicated down the road. For instance, consider the following issues:
- It may be left open whether the tribunal would rule on legal issues that are relevant for the expert’s factual determination.
- If an expert determination proceeding is complete, the question is whether the tribunal would review that decision (or decide whether, and if so, to what extent, such a review is mandated by the applicable law).
- If an arbitration on other (related or un-related) post-M&A claims is pending:
A. A question often left open is whether a party is allowed to bring a new claim to the arbitration (which may already be at a late stage) based on the factual findings of the expert.
B. Finally, whether the arbitrators should stay the proceedings until the expert has rendered a decision, or whether the respective party should commence a new arbitration if those proceedings concluded before the expert issued the factual determination.
A similar approach is to assume jurisdiction while dismissing the claim on the merits as premature before the expert determination has concluded, as recently confirmed by a German court. This would avoid the second issue listed above but can still lead to prolonged arbitral proceedings or even necessitate starting a new arbitration in the third situation listed above.
These are serious practical questions. It is therefore strongly advised to ensure in the SPA that the expert determination and the arbitration proceedings are coordinated – again, in case of doubt, with help from dispute specialists.
Consider Enhancing the Arbitration Clause
It is usually good advice not to tinker with the arbitration clause and rather stick to the model clause provided by the arbitration institution whose arbitration rules should be applied. However, there are certain procedural aspects that the parties may agree on upfront, knowing that it may be difficult to agree on these later once the parties are in a dispute and it would then be left to the tribunal’s discretion to fill the void. Thus, while the model arbitration clause should in general not be amended, the parties may consider the following two examples as potential add‑ons:
- Regulating the introduction of new claims in an ongoing arbitration: Given that post-deal disputes often touch on many individual issues, it is common that more than one claim is brought in the arbitration (including counterclaims). As the time goes on, there may be further claims that one side wants to introduce in the already ongoing arbitration, which is a particularly salient issue in post-deal disputes. For instance, consider a buyer’s indemnification claim regarding a third-party claim that was made only after the arbitration had already commenced. Arbitration rules contain different procedural limitations for the introduction of a new claim, but effectively provide the tribunal with broad leeway to decide whether to accept a new claim or not. This creates uncertainty for the parties. As a rule of thumb: the more the arbitration has progressed and the more isolated the new claim is from the other claims, the less likely it is that a tribunal would allow the new claim to be introduced in the arbitration. This may, however, not be in the parties’ interests given that each side may identify new claims only later, and it may appear prohibitive or at least inefficient to start an entirely new arbitration for these claims. On the other hand, complex new claims brought only late in the arbitration may also prolong the proceedings, since it may necessitate new submissions, and potentially new (witness) evidence or even a new document production phase. It therefore appears reasonable that the parties consider including a rule as an add-on to the arbitration clause that new claims can be brought even later in the arbitration (up to a specific point) and that the tribunal should (i) decide together with the parties on a new procedural timetable for the new claims and (ii) if possible, render a partial award on the older claims (i.e. without waiting for a decision on the new claims). An arbitral tribunal would either feel bound by the parties’ agreement or, at the very least, strongly consider it in its decision whether to allow a new claim to the proceedings. In either way, the agreement would increase predictability on this procedural issue.
- Incentive to bring all claims in the arbitration: To limit the risk that new claims are raised (long) after the arbitration has commenced (or after the cut-off date until new claims are allowed into the arbitration), it may be useful to incentivize each side to bring all claims into the arbitration as early as possible. The strongest possible agreement would be that after a cut‑off date, new claims, known or unknown, can no longer be brought into the current or any future arbitration (in other words, the claim would be forfeited). The parties may, however, not be able to agree to such a rule, which effectively is a sort of longstop period. The second-best option is to stipulate that new claims are only forfeited after a cut-off date if they were known or could have been known by the cut-off date by the party seeking the introduction of the new claims in the ongoing arbitration. This would not preclude that new claims arise later, or that a claim is made in a new arbitration, but it would reduce this risk.
Summary
Arbitration proceedings can be long, but (out-of-court) post-deal disputes can even be much longer. There is no golden path to exclude the risk of overly long post-deal disputes, but there are certain elements that the parties can consider to limit such risk. This short article offers some ideas for issues that frequently prolong post-deal disputes: indemnity claims and statute of limitations, the lack of coordination between expert determination and a tribunal’s jurisdiction, and adding new claims to an already pending arbitration.
*Alexander Grimm is Principal Associate in the International Arbitration Group at Freshfields in Frankfurt (Germany). He has experience as party representative in highly complex and technically demanding international arbitration proceedings (such as disputes in the pharmaceutical industry, the aviation industry and infrastructure projects), as well as in post-M&A and investor-state arbitration proceedings.