Drafting Arbitration Clauses in M&A Agreements
M&A arbitration often relates to price adjustment disputes, misrepresentations and breach of warranties, or the pre-contractual failure to disclose relevant information (usually involving allegations of fraud, wilful misconduct or gross negligence with a view to avoiding the application of clauses limiting liability). The specificities of M&A disputes are pertinent to the drafting of the arbitration clauses themselves.
This chapter is divided into two main sections. The first addresses some basic rules that apply to the drafting of arbitration clauses in general. The second focuses on certain characteristics pertaining to M&A disputes; in particular, matters that drafters may wish to consider when formulating arbitration clauses in this context.
Basic drafting rules for arbitration clauses
The arbitration clause must reflect the parties’ consent to have their dispute settled through arbitration. Including the word ‘arbitration’ in a contract is generally sufficient to demonstrate the intention of the parties. To avoid confusion and interpretation issues at a later stage, it is advisable to avoid language that could contradict or call into question that intention; for instance, by providing recourse to both arbitration and litigation, or by incorporating an appellate mechanism in respect of the arbitral award.
Most national laws governing the arbitration process and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) require the arbitration agreement to be ‘in writing’. The rationale is that the decision to use arbitration constitutes a waiver to a fundamental right of access to national courts (an approach that is arguably obsolete, possibly even contradictory, given the consensus view that nowadays arbitration is the ordinary means of dispute resolution for international commercial disputes). However, this requirement should not pose a concern in the context of M&A transactions, as these are typically governed by written agreements.
The arbitration agreement should contain broad language to ensure that any dispute arising from the M&A transaction is resolved by arbitration, unless the parties intend to proceed otherwise; for instance, by submitting specific disputes to an expert. Whenever possible, the arbitration agreement should reflect the wording recommended by the selected arbitral institution. Broad wording used to describe a dispute or contractual relationship covered by the arbitration agreement will include wording similar to the following model clause recommended by the IBA:
All disputes arising out of or in connection with this agreement, including any question regarding its existence, validity or termination shall be finally resolved by arbitration.
Issues regarding the scope of the arbitration clause can arise when parties refer specific disputes to different mechanisms; for instance, price adjustment disputes to an expert and all other disputes to an arbitral tribunal. The contract needs to clearly delineate the types of disputes that will be submitted, the intended mechanism to resolve those disputes, and how those mechanisms might interact with one another. This issue is discussed in more detail in the section on expert determination, below, and in Chapter 3 on conflicts between expert determination and arbitration clauses.
Seat of the arbitration
The seat of the arbitration (usually a city) determines the law that will govern certain procedural aspects of the arbitration, such as the powers of the arbitrators and judicial oversight of the arbitral process, as well as challenges to awards. The law of the seat of the arbitration determines the extent to which local courts may intervene in the arbitration proceedings, be it to hinder (by unwanted interventions) or to support them. To the extent possible, it is therefore appropriate to choose a seat where the legislation and the courts are supportive of arbitration, and for enforceability purposes, located in a signatory state to the New York Convention.
In M&A agreements, as in other types of contracts, agreeing on a seat is not always easy, and it may be that one party will try to impose a seat that the other party deems inappropriate. In this event, rather than agreeing on a seat, which may prove inadequate for the reasons stated above, it may be wiser not to designate any seat. In such a scenario, it is critical to choose an arbitral institution that will be able to decide on the seat, taking into account the interests of the arbitration.
Institutional or ad hoc arbitration
The parties need to decide whether they want their arbitration to be administered by an arbitral institution, under a relatively predetermined procedure, or opt for ad hoc arbitration where the proceedings are managed by the parties themselves, and subsequently by the arbitral tribunal. The trend (to the extent that we may determine it) in M&A practice seems to be to refer disputes to institutional arbitration.
Being assisted by a reputable institution will help parties and tribunals run the proceedings (e.g., by monitoring the process, or handling communications with arbitrators). More importantly, it may provide guidance and support if the arbitration clause is silent on an issue or if the parties cannot agree on some procedural steps (such as the appointment of arbitrators).
Some institutions also scrutinise the draft awards and verify, to a certain degree, that all issues have been determined, without, however, making any review on the merits of the decision itself.
When opting for ad hoc arbitration, it may be preferable to choose a set of predetermined arbitration rules (such as the UNCITRAL Arbitration Rules). In the alternative, the arbitration clause should include a minimum set of rules providing for the composition and appointment of the tribunal. An appointing authority provision should also be included should the parties fail to appoint an arbitrator.
Constitution of the arbitral tribunal
In recent years, some practitioners have voiced concerns about the nomination or appointment of arbitrators by the parties. Nevertheless, parties often see the ability to choose their own nominated arbitrator as one of the main advantages of arbitration. This is also true in M&A transactions where parties value the possibility of appointing arbitrators who, in addition to their experience as arbitrators, understand the complexities and mechanics of these specialised transactions.
Parties may therefore specify the number and method of appointment of the arbitrator or arbitrators in the arbitration clause. Alternatively, both institutional and ad hoc arbitration rules provide default mechanisms for selecting or replacing arbitrators. Since these default mechanisms vary from one institution to the other, it may be useful to examine them before finalising the arbitration clause.
In any case, providing for the specific qualities or qualifications or even naming the arbitrators in the agreement is not recommended. Excessive predictability is tantamount to rigidity and may render the arbitration proceedings very difficult to manage when a dispute arises. Establishing set criteria at the outset may prevent the parties from appointing the arbitrators with the appropriate profile to handle the dispute, which may be different from what the parties had anticipated at the time of entering into the transaction.
Confidentiality may be of importance in M&A disputes. For instance, sellers will not want to disclose any price-sensitive information or confidential information regarding the business and operation of the target; similarly, the buyer, having spent a considerable amount of time and money evaluating a transaction, might want to preserve the confidentiality of its investment from other potential acquirers.
Although it is generally assumed to be, confidentiality is not always an inherent feature of arbitration. The approach to confidentiality can vary between arbitral institutions and jurisdictions. For instance, the Swiss Rules of International Arbitration and the LCIA rules provide that the arbitration be confidential. On the contrary, the ICC Arbitration Rules do not provide for any default confidentiality obligation. Often contracts will provide for confidentiality but where this is not the case, and in the absence of a default provision in the applicable arbitration rules, the parties should seek a confidentiality order from the tribunal.
Aspects related to M&A disputes
Pre-arbitral dispute resolution mechanisms
Considering the complexity and the high stakes involved in mergers and acquisitions, the parties in M&A disputes, as in others, may be tempted to consider pre-arbitral dispute resolution mechanisms, such as mediation (expert determination is discussed in the following section). In this event, the dispute resolution clause should specify whether mediation is mandatory and provide time limits for it to occur.
As a rule, we would advise against implementing mandatory pre-arbitral mechanisms, or, at least, we would advise permitting the commencement of arbitration proceedings in parallel (this last point may be important when the dispute involves questions submitted to expert determination and legal aspects falling within the arbitral tribunal’s jurisdiction). When the dispute occurs, spending several months in a discussion or mediation phase before commencing arbitration could be a false economy as it will merely delay resolution and increase costs (especially if the parties’ disagreement makes a settlement unlikely or even undesirable). By contrast, providing for some flexibility will not prevent parties who consider a settlement is possible from genuinely trying to reach one.
Non-compliance with a pre-arbitral mechanism may also have different consequences depending on the arbitral tribunal and the seat of the arbitration. In Switzerland for instance, a failure to abide by a pre-arbitral mechanism is treated as a ratione temporis jurisdictional issue (the question being whether the tribunal was convened too early) and an award that does not penalise this failure can be challenged. In 2016, the Swiss Federal Tribunal decided, for the first time, to suspend an arbitration that had been initiated before certain required steps of a mandatory conciliation had been completed (the parties had initiated alternative dispute resolution proceedings but failed to hold a mandatory meeting with the neutral third party). The court entrusted the procedure applicable to the suspension and, more importantly, the determination of a reasonable time limit for the suspension to the arbitral tribunal. The latter therefore remained in control of the proceedings, which de facto reduced the risk of a party attempting to use the mediation as a delaying tactic.
Other jurisdictions have reached different conclusions. For instance, the French courts consider that the failure to abide by a pre-arbitral mechanism is a matter of admissibility of the claim, which is not subject to judicial review pursuant to Article 1502 of the Code of Civil Procedure. The German Federal Court of Justice has reached a similar conclusion. In England, the Channel Tunnel case marked a jurisprudential shift and held that satisfactory participation in an agreed-upon pre-arbitral mechanism was a mandatory step prior to commencing arbitration.
The expert determination
As is explained in more detail in Chapter 3 on conflicts between expert determination and arbitration clauses, it is common in the context of M&A transactions for parties to provide for, alongside their arbitration agreement, an expert determination of factual or technical issues (as opposed to legal issues), such as post-closing price adjustment. The expert determination raises interesting questions, some of which may be considered when drafting the arbitration clause.
First, the expert’s determination is (contractually) binding on the parties (and on the arbitral tribunal) only if the parties have agreed to it. Failing such an agreement, the expert’s findings are non-binding and merely have indicative value; for instance, in view of future negotiations or for the purpose of assessing the chances of success of arbitration proceedings.
The parties may also grant the arbitral tribunal a limited power of review of the expert determination. For instance, the arbitral tribunal may depart from the expert’s findings if the expert was not independent or impartial, if he or she breached fundamental principles of due process and the right to be heard, or if he or she reached a decision that is manifestly incorrect or arbitrary, or goes beyond the mandate given by the parties. The Swiss Federal Tribunal ruled that a decision of an expert may be invalidated through ordinary proceedings (i.e., arbitration if the contract includes an arbitration clause) if the findings of the expert are manifestly unfair, arbitrary, defective, seriously inequitable or rely on erroneous facts, or are vitiated by lack of consent.
Second, even when the expert’s findings are contractually binding on the parties, they do not have res judicata effect and are not enforceable as arbitral awards. Therefore, the parties will need to resort to the courts or arbitration to enforce such findings should a party disregard them.
Third, the contract should specify the tasks or issues delegated to the expert and provide that all other issues not expressly delegated shall be within the competence of the arbitral tribunal. However, even in this case, it may be useful to specify that the determination of the scope of the expert’s competence under the contract falls within the jurisdiction of the arbitral tribunal. Several factors favour this course. First, the jurisdiction of the arbitrators is broader while the expert is entrusted with specific issues related to his or her field of expertise only. Second, the issues of jurisdiction are of a legal nature and an expert with a different background may not feel comfortable having to determine such an issue. To avoid paralysing the whole dispute mechanism, it may be wise to provide that the arbitral tribunal and the expert may be seized of the matter in parallel.
Arbitration clauses and expert determination clauses may also provide that an expert may make a preliminary determination on a legal issue if this is necessary for the expert to be able to render a determination (e.g., the interpretation of a price-adjustment clause or filling a gap in the contract where a definition is missing). In this event, it is wise to provide that the preliminary determination of an issue that does not fall within the expert’s field of specialisation be not binding on the parties and the arbitral tribunal, should arbitration proceedings follow the expert determination.
Many institutional arbitration rules provide for fast-track (or expedited) arbitration, where the maximum duration is in principle limited to a few months. Expedited proceedings essentially apply when the amounts in dispute are relatively small. However, nothing prevents parties from referring their dispute to fast-track arbitration in other cases not foreseen by existing institutional rules. Increasingly, arbitration is being criticised by some parties and practitioners for its costs and cumbersome processes. Expedited procedures may therefore be of interest to users in cases where the amounts in dispute are more significant.
As regards M&A arbitration, parties may, for instance, consider that in situations where the role of the arbitrators is limited to assessing whether the decision of an expert is arbitrary, it is not necessary to apply the standard arbitration procedure.
However, before opting for expedited proceedings in M&A disputes, certain issues must be considered:
- providing for expedited proceedings if a certain type of dispute arises and normal proceedings for others may prove very difficult to manage once a dispute has arisen;
- the requirements of fast-track arbitration may also be difficult to reconcile with the existence of a parallel expert determination procedure; and
- document production may play a central role in certain M&A disputes, notably when a party alleges that its opponent knowingly provided inaccurate or misleading representations and warranties. In such cases, fast-track arbitration may prove highly inadequate. The same is also true when the factual or legal issues at stake are complex (for instance, it is difficult to require that the arbitration proceedings be completed within six months when it takes at least several months for a party-appointed expert to prepare a report).
Consolidation or joinder
M&A deals may be concluded through a suite of transaction instruments involving multiple parties, each of which can have their own dispute resolution clause. This could potentially lead to several disputes arising out of various contracts between several parties, all of which could be the subject of multiple parallel proceedings although they all relate to a single transaction. We may consider as an example an M&A transaction between a seller and a buyer related to a target company (with multiple contracts between the seller and the buyer), where a holding company controlling the seller and the target company provides guarantees to the buyer by way of a side agreement. In case of misrepresentations and breaches of warranties by the seller, the buyer may want to act against both the seller, on the basis of the various instruments entered into with the seller, and against the holding company on the basis of the side agreement.
As explained in further detail in Chapter 2 on joinder and consolidation issues, permitting consolidation of two or more separate arbitrations into a single arbitration, or the joinder of additional parties into a single arbitration, can save time and costs, ensure consistency, and provide the tribunal with a complete picture of the transaction at issue.
However, the use of this procedural tool is conditioned on whether all parties previously agreed to certain terms and conditions at the contract drafting stage. In particular, the arbitration clause should refer to arbitration rules that provide for the possibility of consolidating two or more arbitrations. The arbitration clauses contained in the various contracts must be identical or, at the very least, compatible (same institutional rules, same number of arbitrators and same seat of the arbitration).
Institutional arbitration rules will generally set out the conditions and procedures for consolidation, including deadlines and rules regarding the appointment of the tribunal in cases where it is not possible for each party to appoint an arbitrator. These rules may vary in important ways; for example, arbitral institutions in recent years have updated their institutional rules regarding consolidation. For example, the 2014 LCIA Arbitration Rules only allowed arbitrations to be consolidated when they arose between the same disputing parties, whereas, the 2020 LCIA Arbitration Rules add that consolidation can also take place when they arise out of ‘the same transaction or series of related transactions’. By incorporating such rules into the arbitration agreement, the parties are deemed to have consented in advance to a future possible consolidation of the various arbitration proceedings.
In practice, it is difficult to consolidate proceedings when the parties to the various agreements are not the same (the fact that the parties are identical in all proceedings may be a condition for an arbitral institution to order consolidation, unless the parties agreed otherwise). Hence, when parties to the various contracts are different, it is important to provide in each contract for the possibility of consolidating proceedings under the contract at issue with other proceedings relating to other contracts even if the parties are not the same.
Such clauses are challenging to draft properly. It is important, for instance, to provide specific time limits on the option to pursue consolidation. Planning for such eventualities will safeguard ongoing proceedings from potential disruption. This may be a significant concern, especially when such proceedings may already be at an advanced stage. Pursuing such an approach prevents a proceeding from being unexpectedly suspended or blocked because another dispute under a related contract has now arisen. The appointment of the tribunal may also be problematic, especially if a dispute under a related contract surfaces after the appointment. Again, such contingencies should be accounted for when drafting the arbitration clauses.
The issuance of provisional measures in an M&A arbitration may be called for in certain circumstances. For instance, provisional measures may be warranted in the following situations:
- in the closing phase (between signing and closing), to prevent a seller from aggravating the financial situation of the target company before closing;
- to enjoin a party from disposing shares of the target company; or
- to order a party to refrain from calling up a bank guarantee issued to secure the parties’ obligations.
Several prominent international arbitration institutions already incorporate special provisions for emergency arbitrators in their rules. These rules generally share the following features: prompt appointment of a sole arbitrator (usually within a couple of days), the rapid rendering of a decision within a limited period (usually counted in days or weeks), and a provision barring the designated emergency arbitrator from acting thereafter on the merits phase of the dispute. The nature (an order or an award) and enforceability of a decision rendered by an emergency arbitrator will depend on the rules governing such procedure and the place where such decision is to be enforced.
 Anne Véronique Schlaepfer and Alexandre Mazuranic are partners at White & Case SA.
 In the case of failure to disclose, the seller would have hidden important information, which if known would have had a substantial impact on the price or even prevented the transaction altogether. In this circumstance, the party raising a claim for fraud will seek to disapply the limitation of liability clauses. This type of dispute is not specific to M&A transactions and does not call for any specific drafting considerations to the arbitration clause.
 Gary B Born, International Commercial Arbitration (Second Edition), Kluwer Law International 2014, p. 764.
 The writing requirement has often been interpreted in view of the evolution of technology; for example, France does not require the arbitration agreement to be in writing (see Article 1507 of the Code of Civil Procedure, as amended by Decree No. 2011-48 of 13 January 2011: ‘La convention d’arbitrage n’est soumise à aucune condition de forme.’ ‘The arbitration agreement is not subject to any form requirement.’).
 IBA Guidelines for Drafting International Arbitration Clauses, Guideline 3, para. 18.
 ibid., Guideline 4, para. 21.
 ibid. Guideline 4, para. 22.
 e.g., the ICC scrutinises the entire award, while the Court of Arbitration of the Swiss Chambers’ Arbitration Institution will only review the cost decision contained in the award.
 Blackaby, Partasides, Redfern et al., Redfern and Hunter on International Arbitration (Sixth Edition), Oxford University Press 2015, p. 42, para. 1.141.
 Joe Liu, Arbitration of Cross-Border M&A Disputes, Kluwer arbitration blog, 21 April 2015.
 Swiss Rules of International Arbitration (2012), Article 44; see also, LCIA Arbitration Rules (2020), Article 30.
 See, e.g., ICC Arbitration Rules (2017), Article 22(3).
 Decision of the Swiss Federal Tribunal dated 16 March 2016 in Case 4A_628/2015.
 Paris Court of Appeal, 4 March 2004, Société Nihon Plast Co. v. Société Takata-Petri Aktiengesellschaft, Revue de l’arbitrage 2005, p. 143 et seq.; see the article published in The Paris Journal of International Arbitration, 2013, Vol. 2, p. 327 et seq., by one of the co-authors: ‘Jurisdiction and Admissibility: a subtle distinction, not always easy to make in international arbitration’.
 German Federal Court of Justice (BGE), decision published in: (1999) Neue Juristische Wochenschrift, Heft 9, p. 647 s., BGE, decision published in: (1984) Neue Juristische Wochenschrift, Heft 12, p. 669 s.
 Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd., ICC Case No. 6276 (1993), 2 WLR 262, p. 276 et seq. The court found that it had ‘an inherent power to stay proceedings brought before it in breach of an agreement to decide disputes by an alternative method’.
 In arbitral proceedings, there exists different institutional rules that parties may consider when drafting their own expert determination clauses. Institutions may assist the parties in recommending an expert, in appointing one or in administering the entire expert procedure.
 Balz Gross, ‘M&A disputes and expert determination: getting to grips with the issues’, in PLC Cross-border Arbitration Handbook 2010–2011.
 Decision of the Swiss Federal Tribunal dated 17 November 2008 in Case 4A_438/2008, para. 3.2.
 Balz Gross, ‘M&A disputes and expert determination: getting to grips with the issues’, in PLC Cross-border Arbitration Handbook 2010–2011.
 For example, the 2020 LCIA Arbitration Rules, Article 22.7(ii) and the 2014 LCIA Arbitration Rules, Article 22.1(x).
 Andrea Carlevaris, ‘The Arbitration of Disputes Relating to Mergers and Acquisitions: A Study of ICC Cases’, 2013, ICC International Court of Arbitration Bulletin Vol. 24 No. 1.
 For example, the ICC, the Swiss Chambers’ Arbitration Institution, the Stockholm Chamber of Commerce or the LCIA.