How the Choice of Substantive Law in M&A Contracts can Affect the Outcome of M&A Disputes

M&A transactions generate a large number of disputes. Although statistics are hard to come by, warranty and indemnity insurance carriers receive claims in approximately one in five deals.[2] Contract wording, the facts and procedural rules are key determinants of success or failure. However, practitioners frequently overlook the fact that the choice of substantive law governing the M&A contract is also pivotal in the generation and resolution of M&A disputes. In fact, certain legal regimes may tend, at least in a dispute context, to be either more buyer-friendly or more seller-friendly.

This chapter discusses several examples of the differences among substantive laws that can be outcome-determinative based on the country survey of substantive laws in Part II of this guide. Of course, sometimes parties will have only limited options, and where they are able to choose, many factors will affect the choice of substantive law. These include the location of the seller or target, familiarity of the parties, courts or counsel with the law and the desired transaction mechanics. However, parties and counsel are well advised when drafting M&A contracts to consider additionally the aspects of the prospective substantive law that may influence the outcome of a prospective dispute.

Gauging how easily the buyer can overcome limitations on liability

One of the key factors that can multiply both the complexity of a potential dispute and the quantum is the likelihood of a buyer being able to raise ancillary claims under tort or intentional breach. Under the laws of most jurisdictions, liability for claims such as intentional misrepresentation or fraud cannot be excluded in contract. Additionally, under the laws of many jurisdictions, contractual caps on damages as well as other contractual limitations on liability (such as time limits for raising claims) are unenforceable in respect of intentional misrepresentation or fraud.

Accordingly, buyers have a strong incentive to raise claims based on tort or intentional wrongdoing in arbitration in the amount of their uncapped damages. Even where the applicable law requires that fraud be pleaded with particularity, frequently these rules do not carry over into arbitration. Thus, where M&A disputes are subject to arbitration clauses, a ‘perfect storm’ can drive M&A claims: on the one hand, low or ‘notice’ pleading standards for the notice or request for arbitration under the rules of most arbitral institutions, and serious claims and remedies, on the other hand, that are normally available in litigation only if supported by full or particular evidence.

Accordingly, it is important to consider the requirements for such claims under the applicable substantive law, in particular in combination with an arbitration clause.

The test for claiming intentional misrepresentation or fraud

The fourth section of each chapter in Part II addresses the applicable standard in the case of fraud or a failure to disclose information in the transaction phase. The scope of this standard, and the extent to which parties may derogate from it in contract, are key factors in determining the volume of fraud-related M&A disputes. This is without doubt a key factor that parties should consider in choosing the applicable substantive law for their agreement.

Based on the countries represented in Part II, the civil law jurisdictions tend to be more protective of buyers (China, Italy, Germany, Switzerland, South Korea), with the common law countries adhering more closely to a caveat emptor approach that creates a greater obstacle for claims of intentional misrepresentation and fraud (the United Kingdom and the United States).

For example, at the far end of the liberal spectrum, Delaware courts allow parties to exclude liability for all extracontractual statements as well as statements in the M&A contract that are grossly negligent, drawing the line only at deliberately false representations made in the M&A contract.[3] By contrast, in Germany, liability for intentional breach cannot be excluded in contract and ‘intentionality’ comprises a much lower standard, namely a statement made with knowledge of its falsity or reckless indifference to its potential falsity, but not requiring any knowledge of the potential harm or any intention to harm the recipient (dolus eventualis).[4]

Pleading and burden of proof issues

In all jurisdictions, a buyer claiming intentional misrepresentation or fraud will bear the burden of proof. However, in some jurisdictions there is a shift of the burden of proof in cases where one party has better access to information or has been accused of wrongdoing. This burden-shifting, in turn, may be characterised as procedural or substantive. Burden-shifting can give the party lacking evidence (usually the buyer) a significant advantage and can thus be relevant to the choice of law. For example, in certain civil law jurisdictions without any general mechanism for document disclosure in litigation, the substantive law has accommodated the (inevitable) information disparity between victims of fraud and perpetrators of fraud with an accommodation of a switching of the burden of proof.

In South Korea, for example, claimants are not required to prove wilfulness as an element in breach of contract; rather, the burden of disproving wilfulness switches to the breaching party.[5] A similar rule applies in Switzerland, where Article 97 of the Code of Obligations requires the responding party to disprove ‘fault’ (i.e., the requisite level of intent).[6]

Where the substantive law of one jurisdiction is combined with an arbitration, this ‘mix-and-match’ can create some unforeseen consequences. In arbitration, parties usually do have access to some level of document disclosure. Thus, claimants may actually have a double advantage – greater access to information regarding the internal decision-making at the respondent than they would normally have under the procedural law of their country in litigation, combined with the burden-shifting under that substantive law.

Additionally, the procedural laws of certain jurisdictions with lower, or ‘notice’, pleading standards in litigation impose heightened pleading requirements in the case of fraud. For example, in England, allegations of fraud must be made in a ‘clear and precise’ manner and include ‘proper details of the alleged dishonesty’.[7] In the United States, matters involving fraud, mistake and conditions of mind must be pleaded with particularity.[8] The Arbitration Rules of the International Chamber of Commerce (ICC), for example, require that the request for arbitration contain merely ‘a description of the nature and circumstances of the dispute giving rise to the claims and of the basis upon which the claims are made’.[9] The Rules of the United Nations Commission on International Trade Law (UNCITRAL) require only a ‘brief description of the claim’.[10] In practice, several months can pass before a claimant in arbitration under the ICC or UNCITRAL Rules is required to submit its full evidence.

The danger here is that buyers can put large (uncapped) claims of intentional misrepresentation or fraud into play without any obligation to evidence those claims for many months. This is in strong contrast to the norm in civil law countries, which generally require substantiated pleading, but as seen above, also lower than the standard in common law countries, which require pleading with particularity.

Where both counsels and the judge are familiar with the rules, and effective sanctions regimes can be triggered, national rules of professional conduct can provide a meaningful limit to raising unmeritorious claims. In England, for example, professional conduct obligations forbid lawyers admitted to practise from alleging fraud without reasonable credible supporting material.[11] Similarly, in the United States, attorneys signing pleadings warrant that the claim, to the signor’s ‘knowledge, information and belief, formed after an inquiry reasonable under the circumstances . . . is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation’ and ‘the factual contentions have evidentiary support’.[12] In arbitration, however, there is less familiarity with these regimes of national ethical rules and their enforcement is not straightforward, in particular when counsel is admitted in different jurisdictions.[13]

Raising tort claims in parallel with contractual claims

Where the same factual circumstances can give rise to both contractual and non-contractual claims, the question arises as to whether they are duplicative. In certain jurisdictions, law or doctrine may prevent an injured party from asserting tort claims in parallel. In New York, for example, courts will dismiss fraud claims as duplicitous of contract claims when they arise from the same facts, do not allege breaches of duties independent of the parties’ agreements and support claims for the same damages as claimed under contract.[14] Where there is a breach of a duty of care distinct from the contract, however, parallel claims may be maintained.[15]

In other jurisdictions, both contract and tort claims may be maintained, even if they arise from the same set of facts and circumstances (e.g., in Germany,[16] Italy[17] or China[18]).

As stated above, the availability of tort claims parallel with contractual claims may be important, in particular as contractual limitations on liability (e.g., damages caps and limitations periods) will generally not extend to ancillary tort claims.

Extending choice-of-law clauses to tort claims

Given the differences in approach outlined above, the outcome can be determined by whether an ancillary tort claim is governed, for example, by New York law, on the one hand, or by Italian, German or Chinese law on the other hand. Where parties are free to choose the governing law, most professionally drafted M&A contracts will include a choice-of-law clause. However, not all choice-of-law clauses extend expressly to ancillary tort claims (e.g., ‘any and all claims arising out of or in connection with’ the M&A contract).

In most of the surveyed countries, the freedom of contract extends to ancillary tort claims. Accordingly, in the European Union, commercial parties may agree on the application of foreign law to tort claims, either before or after the tort takes place.[19] Similarly, parties may agree on a choice of law for tort in South Korea[20] and in China (either before or after the tort occurs).[21]

However, there is considerably less clarity about whether a choice-of-law clause that does not specifically extend to tort claims will be interpreted to encompass them. In the United States, where most tort law is governed at the state level, there are a variety of approaches. Whereas some states may extend contractual choice-of-law clauses to tort (e.g., Delaware), others will likely not (e.g., New York).[22] Where there is no contractual choice, the default rule in China, as in many countries, is to apply the law of the place where the tortious activity took place or the law of the residence of the tortfeasor[23] (or, in many cases, the place where damage was incurred).

Depending on the locations of the parties and their choice of law for contractual claims, it is therefore possible that this choice-of-law exercise could lead to the application of one law to the contractual claims and another law to the tort claims, even where these claims arise out of the same facts and circumstances.

Given the freedom that most jurisdictions provide to elect the law applicable to tort, parties are well advised to familiarise themselves with the treatment of ancillary torts under the law governing the contract and to reduce uncertainty by electing the law applicable to any tort claims.

Pooling knowledge of persons at shareholder, seller and target levels

M&A contracts typically seek to limit representations and warranties to the knowledge of a defined group of persons at the seller. However, parties should be aware of any default rules on knowledge attribution that they may apply where there is no contractual limitation. Of particular relevance are rules that would impute, attribute or pool the knowledge of sellers with knowledge of management or target representatives. A selling shareholder may have little or no knowledge of the relevant facts and circumstances at the target, for example, if the seller has only recently acquired the target or is not closely involved with its day-to-day business affairs. If a buyer’s claims centre on a failure to disclose certain information regarding the target, the applicability of that knowledge imputation or pooling rules in the applicable substantive law can materially affect the success of the claims or the corresponding defences.

In the United States, for example, knowledge at a subsidiary acting as an agent or alter ego controlling its parent could be attributed to the parent.[24] In English law, there is a detailed set of rules regarding attribution of the knowledge of natural persons to companies for the purposes of determining corporate liability.[25] Under the rules of some jurisdictions, external counsel and M&A advisers may be included in the circle of the seller as its agents for the purposes of knowledge attribution (e.g., Germany[26] and Switzerland[27]). In other countries, the knowledge of shadow directors or persons with de facto control or influence (including management) may be attributed under appropriate circumstances (e.g., South Korea[28]).

It is without question best practice to employ strict contractual definitions for knowledge. In Germany, for instance, liability may be effectively excluded in contract both for intentional misstatements as well as in respect of ‘performance agents’ (Erfüllungsgehilfen) and ‘knowledge representatives’ (which may include target representatives).[29] However, owing to the importance of this point, sellers are well advised to enquire whether there are any circumstances under which the substantive law of choice will not enforce contractual limitations of knowledge, for example, in claims involving intentional wrongdoing or fraud.

Availability of unusual remedies to buyers

The remedies available under substantive laws differ among jurisdictions. Whereas all jurisdictions allow for money damages, some jurisdictions prioritise specific performance or may even provide for rescission or unwinding of the transaction in certain circumstances. If the deal does not close, can a seller or a buyer force the other to perform? Both buyers and sellers are well advised to understand the scope of potential remedies under the chosen substantive law.

Given that there are often multiple remedies available at law, parties frequently seek to limit remedies to those described in the contract (typically, indemnification for breach of a representation or warranty, with limitation periods that may be shorter than statutory periods and capped damages). However, these limitations may not be enforceable. In Italy, for example, clauses purporting to exclude the right of a party to rescind the contract are unenforceable, as are clauses excluding or limiting liability for wilful misconduct or gross negligence.[30] In Germany, the line is drawn at ‘intentional’ misrepresentation.[31] However, comparing the levels of requisite culpability across jurisdictions must be done in detail, as the labels may not be comparable.[32]

Without doubt, one the most drastic remedies is rescission or unwinding of the transaction. Even if the remedy is seldom obtained, it is at least theoretically available (e.g., in Switzerland,[33] Germany,[34] England[35] and the United States[36]). In a highly publicised case, for example, Abu Dhabi’s International Petroleum Investment Company sought, and ultimately obtained, unwinding of its purchase of Ferrostaal from MAN when issues involving alleged corruption at the target came to light after closing.[37]

Special rules around damages calculations

How damages are to be calculated

As discussed in Chapter 5, the choice of method can have a significant effect on the measure of damages. Parties and arbitrators should be aware of this legal backdrop in preparing and assessing expert evidence.

In Germany, for example, there is a distinction between ‘reliance’ damages (available in respect of intentional misrepresentation) and ‘expectation’ damages (available in respect of normal breaches of contractual representations or warranties’).[38] This distinction largely mirrors the distinction under English law between tortious damages (putting the claimant in the position it would have been in had the wrong not been perpetrated) and contractual damages (restoring the claimant to the position it would have been in, assuming performance).[39] However, the precise formula in any jurisdiction is probably defined with some specificity, and there can be substantive differences of which parties should be aware.

Enquire about any special substantive law issues

There may be special substantive issues in the given jurisdiction that bear consideration. Some jurisdictions may subject M&A transactions to substantive rules governing sale of goods or require ‘inspection’ of the target,[40] whereas others may subject them to laws governing general terms and conditions,[41] consumer protection laws or laws concerning unfair contract terms. Some jurisdictions may enforce ‘best efforts’ requirements, while others will not.

Finally, every jurisdiction will have its own specific doctrine on force majeure and the enforcement of material adverse change clauses.

Conclusion and recommendations

As the brief survey above demonstrates, there are a number of key issues that are handled in very different ways by the substantive law of various jurisdictions. These differences, in turn, can have a material effect on the outcome of an M&A arbitration. Given the relatively high likelihood of disputes, particularly in larger transactions, parties and counsel should consider the choice of substantive law carefully.


[1] Amy C Kläsener is a partner at Jones Day.

[2] Estimates range from approximately 18 to 26 per cent (D Froneberg and D Dreier, ‘AIG Studie 2019: Steigende Azahl der Meldungen und höhere Schäden’, in M&A Insurance, Grundlagen – Praxis – Trends (June 2019), p. 36) to 55 per cent (SRS Acquiom, Claims Insights Report (December 2018), p. 16). AIG states that the claims rate exceeds 20 per cent in all but the smallest deals. See AIG Claims Intelligence Series, ‘M&A: Elevated Claim Levels Put Focus on Due Diligence’ (2021), p. 3, at (last accessed 2 December 2022).

[3] M J Weldon and T A Warns, ‘United States’ in M&A Arbitration Guide (Kläsener (ed.), Fourth Edition, Global Arbitration Review (GAR), 2022) (GAR M&A Arbitration Guide), under ‘Fraud and failure to disclose’ (citing Express Scripts, Inc. v. Bracket Holdings Corp., 248 A.3d 824 (Del. 2021)).

[4] See M Rohls, ‘Germany’ in GAR M&A Arbitration Guide, under ‘Fraud and failure to disclose’.

[5] See C-W Lee, U Cho and J H Kim, ‘South Korea’ in GAR M&A Arbitration Guide, under ‘Burden of proof’.

[6] M Bösch and P Rohn, ‘Switzerland’ in GAR M&A Arbitration Guide, under ‘Burden of proof’.

[7] W Hooker, I Ding and L Redman, ‘United Kingdom’ in GAR M&A Arbitration Guide, under ‘Fraud and failure to disclose’.

[8] US Federal Rules of Civil Procedure, Rule 9(b).

[9] ICC Rules of Arbitration (2021), Article 4.3(b).

[10] UNCITRAL Arbitration Rules (2021), Article 3(e).

[11] W Hooker, I Ding and L Redman, ‘United Kingdom’ in GAR M&A Arbitration Guide, under ‘Availability of tort claims’.

[12] US Federal Rules of Civil Procedure, Rule 11(b)(1), and 11(b)(3).

[13] See A Kläsener and C Lotfi, ‘Party and Counsel Ethics in the Taking of Evidence’ in The Guide to Evidence in International Arbitration (Kläsener, Magál and Neuhaus (eds.), First Edition, GAR, 2021), pp. 46-64, at p. 61.

[14] e.g., Cronos Group Ltd. v. XComIP, LLC, 64 N.Y.S.3d 180, 186 (App. Div. 1st Dep’t 2017) (‘a fraud claim is not stated by allegations that simply duplicate, in the facts alleged and damages sought, a claim for breach of contract, enhanced only by conclusory allegations that the pleader’s adversary made a promise while harboring the concealed intent not to perform it’).

[15] M J Weldon and T A Warns, ‘United States’ in GAR M&A Arbitration Guide, under ‘Availability of tort claims’.

[16] M Rohls, ‘Germany’ in GAR M&A Arbitration Guide, under ‘Availability of tort claims’.

[17] A Scagliarini, ‘Italy’ in GAR M&A Arbitration Guide, under ‘Availability of tort claims’.

[18] Y Zhang, F Yeoh and M Wang, ‘China’ in GAR M&A Arbitration Guide, under ‘Availability of tort claims’.

[19] A Scagliarini, ‘Italy’ in GAR M&A Arbitration Guide, under ‘Law applicable to tort claims’.

[20] See, C-W Lee, U Cho and J H Kim, ‘South Korea’ in GAR M&A Arbitration Guide, under ‘Law applicable to tort claims’ (citing Supreme Court Decision 2009Da77754 rendered on 25 October 2012).

[21] Y Zhang, F Yeoh and M Wang, ‘China’ in GAR M&A Arbitration Guide, under ‘Availability of tort claims’.

[22] M J Weldon and T A Warns, ‘United States’ in GAR M&A Arbitration Guide, under ‘Law applicable to tort claims’.

[23] Y Zhang, F Yeoh and M Wang, ‘China’ in GAR M&A Arbitration Guide, under ‘Law applicable to tort claims’.

[24] M J Weldon and T A Warns, ‘United States’ in GAR M&A Arbitration Guide, under ‘Knowledge sharing’ (citing Fireman’s Fund Ins. Companies v. Meenan Oil Co., 755 F. Supp. 547, 556 (E.D.N.Y. 1991) and Simon v. Philip Morris, Inc., 86 F. Supp. 2d 95, 109–10 (E.D.N.Y. 2000)).

[25] W Hooker, I Ding and L Redman, ‘United Kingdom’ in GAR M&A Arbitration Guide, under ‘Knowledge sharing’.

[26] M Rohls, ‘Germany’ in GAR M&A Arbitration Guide, under ‘Knowledge sharing’.

[27] M Bösch and P Rohn, ‘Switzerland’ in GAR M&A Arbitration Guide, under ‘Knowledge sharing’.

[28] See C-W Lee, U Cho and J H Kim, ‘South Korea’ in GAR M&A Arbitration Guide, under ‘Knowledge sharing’ (citing Supreme Court Decision 2009Da77754 rendered on 25 October 2012).

[29] M Rohls, ‘Germany’ in GAR M&A Arbitration Guide, under ‘Knowledge sharing’.

[30] A Scagliarini, ‘Italy’ in GAR M&A Arbitration Guide, under ‘Remedies’.

[31] M Rohls, ‘Germany’ in GAR M&A Arbitration Guide, under ‘Knowledge sharing’.

[32] Intentionality in Germany includes statements made ’into the blue (ins Blaue hinein)’ (i.e., without regard for the ultimate truth of the statement). See M Rohls, ‘Germany’ in GAR M&A Arbitration Guide, under ‘Intention – a shot in the dark’. In a comparative law context, this standard may be deemed to be closer to what other jurisdictions would call gross negligence. See also P Weyland, ‘Garantieversprechen (Warranties) and Erklärungen ins Blaue hinein’, NZG 3/2022, pp. 103–10, at pp. 104–05, 110 (interpreting case law to limit redress for tortious statements made without basis (ins Blaue hinein) to cases in which the buyer had a legitimate expectation that the seller had diligenced the representation or warranty, that is to say that a claim fails where the buyer knows that the seller had not diligenced the statement for forward-looking statements, etc.).

[33] M Bösch and P Rohn, ‘Switzerland’ in GAR M&A Arbitration Guide, under ‘Fraud and failure to disclose’.

[34] M Rohls, ‘Germany’ in GAR M&A Arbitration Guide, under ‘Remedies’ (noting that parties may obtain the remedy of avoidance only up to one year after having become aware of the intentional misrepresentation).

[35] W Hooker, I Ding and L Redman, ‘United Kingdom’ in GAR M&A Arbitration Guide, under ‘Remedies’ (explaining the various grounds on which this remedy may be denied, including certain acts by the claimant as well as the Misrepresentation Act, which bestows on tribunals applying English law discretion to award damages in lieu of rescission in more minor cases of misrepresentation, such as innocent or negligent misrepresentations).

[36] M J Weldon and T A Warns, ‘United States’ in GAR M&A Arbitration Guide, under ‘Remedies’ (citing cases in support of the general rule that it is impracticable to unwind a consummated merger).

[37] The parties ultimately settled, with MAN repurchasing the shares for transfer to a third party (see, e.g., C Bryant, ‘MAN settles dispute with IPIC over Ferrostaal’, Financial Times, 28 November 2011).

[38] M Rohls, ‘Germany’ in GAR M&A Arbitration Guide, under ‘Measure of damages’.

[39] See W Hooker, I Ding and L Redman, ‘United Kingdom’ in GAR M&A Arbitration Guide, under ‘Measure of damages’.

[40] M Bösch and P Rohn, ‘Switzerland’ in GAR M&A Arbitration Guide, under ‘Special substantive issues’.

[41] In Germany, for example, terms and conditions of M&A contracts that were not specifically negotiated and that tend to disadvantage one of the parties may be challenged under general terms and conditions law (even between business parties). But see M Rohls, ‘Germany’ in GAR M&A Arbitration Guide, under ‘M&A deals and restrictions on general terms and conditions’ (‘[i]n practice, it seems perfectly clear, and arbitral tribunals agree, that an M&A transaction is not subject to the limits governing general terms and conditions under German law’; citing Siegfried Elsing, Günter Pickrahn, Karl Pörnbacher and Gerhard Wagner, M&A-Streitigkeiten vor DIS-Schiedsgerichten (First Edition, 2022), at Chapter C, para. 393 et seq. for a recent decision by an arbitral tribunal on the question).

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