Материал: Amy C Kläsener

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Special Issues in Connection with Warranty and Indemnity Insurance

that parties have resort to solo practitioners or academics, and, even then, there may be serious issues with parallel arbitrations.20 However, M&A disputes tend to benefit from the involvement of decision-makers familiar with M&A transactions.

Issues involving document production, confidentiality and legal privilege

Arbitration in the insurance context may trigger special issues in relation to evidence. First, the substantive insurance law governing the policy and the policies themselves grant the insurers broad rights to documents and information when the insured seeks to recover on a claim. In some countries the law provides that there is no coverage where the insured has failed to provide disclosure of all relevant information.

There have been court decisions in which disclosure of information by the insured to insurers in the claim adjustment phase has been deemed to waive legal privilege in subsequent court proceedings. In Asahi v. Pacific Equity Partners,21 the insured provided a report containing legal advice to the insurer. In a subsequent action brought by the insured against the private equity seller,Asahi submitted the same report with redactions for legal privilege. The private equity defendant maintained that Asahi had waived privilege by previously submitting the report to the insurer.The Federal Court of Australia held that the insured had waived privilege.

This decision may be of limited relevance to typical arbitration claims against a W&I insurer. First, where the dispute involves the insurer directly, there is no question that privilege would have been waived. Normally, the insurance policies will be the primary recourse for the buyer (externalising the seller’s risk having been the primary purpose of entering into the policies in the first place). Second, privilege is handled less formalistically in arbitration than in court litigation.The 2010 IBA Rules on the Taking of Evidence in International Arbitration do not require but merely recommend that arbitrators may ‘take into account . . . any possible waiver of any applicable legal impediment or privilege by virtue of consent, earlier disclosure, affirmative use of the Document, statement, oral communication or advice contained therein, or otherwise’.22 Third, parties in arbitration have considerable freedom to agree to their own procedural rules, and the authors see no reason why the parties cannot set out in their procedural rules specific provisions limiting the disclosure of documents, defining privilege or imposing confidentiality obligations.

20For an example of issues arising in a (non-disclosed) parallel case in an insurance context, see Halliburton Company v. Chubb Bermuda Insurance Ltd. [2018] EWCA Civ 817.

21Asahi Holdings (Australia) Pty. Ltd. v. Pacific Equity Partners Pty. Ltd. (Nr. 2), 2014, FCA 481; see Andrew Sharpe, ‘Asahi sends cold shivers down insurers’ spines’, McCabes Lawyers Pty Ltd (8 September 2014), available at https://www.mccabes.com.au/wp-content/uploads/2016/01/Asahi-sends-cold-shiver-down-insurers_- spines1.pdf.

22Article 9.3(d) IBA Rules on the Taking of Evidence in International Arbitration (2010).

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Special Issues in Connection with Warranty and Indemnity Insurance

Issues involving exclusions and damages

W&I policies typically contain a number of exclusions, such as: (1) buyer’s knowledge of breaches at the time of contract (often evidenced in a signed no-claims declaration);

(2) disclosure of the relevant facts in the due diligence process; (3) forward-looking statements; and (4) fraud or intentional misconduct or misrepresentation by the seller or its agents.

In relation to disclosure of the relevant facts in the due diligence process, while SPAs typically define such disclosure as the documents and information disclosed in the data room, many W&I policies include the due diligence reports of buyer’s counsel and agents in this definition.There can be a gap between claims that may lie under the SPA and claims that may lie under the W&I insurance policy.23

In relation to fraud or intentional misconduct, as can be seen in Part II of this book, such claims are common in many civil law jurisdictions, in particular because contractual caps or limitation periods are not enforced in relation to them. Such claims will not play a role in M&A insurance arbitrations. It remains to be seen whether W&I insurance will reduce the overall volume of these claims (many of which are held not likely to succeed on the merits), or whether buyers will continue to seek recourse in respect of such claims against the sellers under the SPA.

Insurers are also often hesitant to extend coverage to breaches of representations and warranties terms relating to environmental laws or anti-bribery or corruption laws.Where a buyer discovers evidence of breaches of environmental law or corruption in the target after acquisition, it will generally be forced to proceed directly against the seller under the SPA.

As mentioned above, insurers also often exclude coverage of any purchase price adjustment claims.

In terms of covered losses, typical exclusions include consequential damages, lost profits and government authority fines. Sometimes ‘consequential damages’ are specifically defined as including damages based on the application of multipliers to the purchase price. It remains to be seen how decision-makers construe exclusions of consequential damages, but these exclusions could have a significant impact on damages awards because multipliers have played a large role in calculating damages in M&A cases. , in particular in relation to breaches of representations and warranties clauses relating to the accuracy of the financial statements.

23I.Varachia,A. Berberich,What’s next in M&A Insurance?; in, M&A Insurance, Grundlagen – Praxis – Trends (May 2018), p. 29.

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Special Issues in Connection with Warranty and Indemnity Insurance

Drafting applicable law and arbitration clauses

Practitioners frequently bemoan that arbitration clauses are added at the last minute without due consideration of their consequences.Whether as a general rule that is true or not, there is little justification for that approach for arbitration clauses where W&I insurance is involved.The purpose of the W&I coverage is to deal with liability that the parties feel may well arise.

As regards the arbitration clause in the SPA, if the insurers wish to have a right to conduct consolidated arbitration proceedings, this should be clearly provided in the clause. In addition, to avoid being drawn in when the insurers may not wish to be involved, the right should (where permissible by law) be asymmetrical: the insurers should have the right to invoke consolidation but not the obligation to conduct disputes under the insurance contracts in the M&A arbitration.

M&A insurance arbitrations are more complex especially if there are a number of insurers and separate insurance contracts. However, a general consent to consolidation of insurer arbitrations can be effective to limit the cost and duration of the arbitration. An express provision is preferable to relying on institutional rules for consolidation of arbitrations under multiple contracts.

For the reasons discussed above, consolidation of proceedings after a claim has been filed may be difficult in practice, and this difficulty may rise along with the number of insurers involved. Should parties wish a single proceeding, this is best considered before the policies are entered into. Insurers and brokers should consider model clauses as a matter of principle as underwriting issues may take precedence.

As an alternative to fully consolidated proceedings, insurers may consider staggered proceedings, where insurers in the higher layers are bound by awards issued in proceedings with the lower layers, potentially in connection with waivers of confidentiality and intervention rights.

Although litigation may offer stronger joinder and consolidation mechanisms than arbitration, parties, and in particular insurers, may nonetheless prefer arbitration, notwithstanding the procedural complexity.This is because insurers generally tend to have less of an interest in consolidation than does the insured. Factors such as confidentiality may be of particular importance to insurers.As seen in Part II of this book, arbitration tends to be the preferred method of dispute resolution for M&A transactions in many jurisdictions, which in turn increases the competence and experience of arbitrators to handle the issues. However, insurers may also consider the likelihood that evidence from seller or target representatives will be needed and the relative ease of summoning such witnesses and evidence in litigation as opposed to arbitration. Finally, the relative advantages and disadvantages of litigation must be considered in light of the jurisdiction in question, as in particular the ability of the courts to require production of documentary evidence tends to be much stronger in common law than in civil law jurisdictions.

Below is a table summarising considerations with respect to the arbitration clause in the SPA and clauses in insurance contracts.

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Settlement and dispositions of W&I insurance disputes

The special aspects of W&I insurance policies also need to be taken into account in disposing of disputes under them. Parties are frequently frustrated by awards that merely split the baby or dispose of disputes generally instead of addressing the details of each claim.

This approach can be not only frustrating but also fundamentally wrong in the case of W&I insurance towers. As discussed above, the contractual structure of the insurance tower is based on the premise that each layer must be addressed successively.While it may be appropriate for insurers in the same layer to be required to pay a certain percentage of the coverage, it would be unusual, and likely inconsistent with the intention of the tower approach, for insurers from all layers to be required to pay the same percentage of the claim. This is because each layer is intended to stand on its own, triggered only where the quantum has been proven to reach the attachment point.

Conclusion

Arbitration is the most prevalent form of dispute resolution for M&A disputes and is also appropriate for resolution of M&A disputes between insureds and insurers under W&I insurance policies. Arbitral tribunals have more experience in dealing with the specific M&A subject matter and can be selected to include the requisite insurance law expertise. However, where the insurance is structured to include a number of separate insurance contracts, careful thought should be given to structuring the arbitral proceedings. If consolidated proceedings are desired, this should be foreseen in the arbitration clauses to avoid a protracted and expensive jurisdictional battle after arbitration is commenced.

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