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Joinder and Consolidation in M&A Arbitration

Anke Meier1

In recent years, arbitration has often been criticised for its high costs and the length of proceedings.2 When it comes to M&A arbitration, however, another aspect can easily frustrate the parties: the alignment of parallel proceedings. According to studies conducted by the School of International Arbitration at Queen Mary, University of London, potential users of arbitration perceive that the lack of a third-party mechanism is one of the ‘worst characteristics’ of international arbitration.3 Since the study was first published in 2006, many leading arbitration institutions have revised their arbitration rules to facilitate multiparty disputes, the joinder of third parties and the consolidation of cases. These improvements were necessary to respond to an increasing number of cases involving more than two parties.The International Chamber of Commerce (ICC) reports that over a third of the newly filed cases in 2017 involved multiple parties, the highest figure after 2016.4

Despite revised arbitration rules, it is still challenging for parties to seamlessly deal with parallel disputes that regularly arise in M&A transactions.There are specifically two contexts that typically occur in the M&A context and both require that the purchaser and seller carefully consider their choices when negotiating the arbitration clause and other provisions of the sale and purchase agreement (SPA).5

1Anke Meier is a partner at Noerr LLP.

2Peters, Fundamentals of International Commercial Arbitration, 2017, 46, 47 et seq.; Born, International Arbitration: Law and Practice, 2015, § 23.

3School of International Arbitration at Queen Mary, University of London, 2015 International Arbitration Survey: Improvements and Innovations in International Arbitration, stating that 24 per cent identify the lack of a third-party mechanism as one of the ‘worst characteristics’ of international arbitration with ‘costs’ being top-ranked.

42017 ICC Dispute Resolution Statistics, ICC Dispute Resolution Bulletin 2018, 201; see also Born,

International Arbitration: Law and Practice, 2015, 227.

5Typically, both contexts give rise to disputes primarily in the post-closing phase, whereas disputes pre-signing and pre-closing mainly relate to disputes among the parties to the transaction, not involving other parties.

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Joinder and Consolidation in M&A Arbitration

On the one hand, there are typical multiparty and multi-contract situations in M&A transactions that can be addressed during the negotiations of the SPA because they arise in the context of the specific transaction, for example, where the purchaser acquires a target from multiple sellers with the SPA additionally extending to guarantors, or acquires simultaneously more than one target from the same seller or sellers through separate SPAs. The parties can handle the procedural challenges deriving out of these types of transactions rather easily if they pay careful attention to the drafting of the dispute resolution clause of the SPA or even conclude a multilateral arbitration agreement to align multiple SPAs.This requires, however, a certain attention to the dispute resolution clause, which traditionally is one of the ‘midnight clauses’ that is not negotiated with priority.6 Often, the attention of the parties is limited to the very basic questions of whether an arbitration clause should be used, the selection of the institution and perhaps the place of arbitration.7 Depending on their choices, the parties may realise only later, after a dispute has arisen, that they are not best equipped to solve the dispute efficiently. Owing to the contractual nature of arbitration, the parties would still have the right to amend or supplement an existing arbitration agreement after the dispute has arisen. Experience shows, however, that reaching an agreement on procedural issues at a later stage is unlikely, because the purchaser and the seller have conflicting interests. The purchaser in particular is well-advised to devote sufficient attention to the dispute resolution clause in the SPA to ensure that it properly addresses the specific context of the transaction, especially with respect to the choice of the applicable arbitration rules.

On the other hand, the typical substantive content of the SPA itself creates multiparty and multi-contract contexts in that potential claims between the purchaser and the seller can depend on legal relationships between the target and other parties.This usually applies to guarantees, representations and warranties given by the seller that can entail a wide variety of subjects, depending on the specific situation and particularly the target’s line of business.8 Typical areas regularly found in SPAs that engage third parties relate to the liabilities and material agreements of the target, the ownership of IP rights and licences, non-violation of any third-party rights and product compliance. In the event of disputes between the target and third parties relating to subjects covered by the guarantees, representations and warranties in the SPA, the purchaser often will face a situation in which it needs to pursue claims for indemnification against the seller under the SPA.The purchaser is therefore faced with parallel proceedings, involving different parties and often also different dispute resolution mechanisms.

Similar situations can arise, perhaps less frequently, out of other substantive provisions of the SPA tying the rights of the purchaser or the seller to the outcome of a legal relationship between the target and other parties. For instance, earn-out provisions or purchase price

6Dorda, M&A und alternative Streitbeilegung, Der Gesellschafter 2012, 5, 6.

7Drude, Post-M&A Arbitration and Joinder: Process and Drafting Considerations for M&A Transactions, SchiedsVZ 2017, 224, 227, stating that ‘[t]here will hardly ever be any meaningful negotiations on details of an arbitration clause.’

8Fischer/Walbert,‘The Arbitration Agreement and Arbitrability, Efficient and Expeditious Dispute Resolution in M&A Transactions’, AustrianYearbook on International Arbitration, 2017, 21, 40, presume that these types of disputes make up ‘the majority’ of the post-closing M&A cases.

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Joinder and Consolidation in M&A Arbitration

adjustment clauses can depend on certain circumstances within the sphere of the target. While situations can be manifold, this chapter focuses on the most common situations that the target is faced with third-party claims.9

A third-party claim creates a different scenario from the one described above since it would, ideally, require an alignment of the dispute resolution mechanism in the SPA with those of the target concluded before, and completely independently from, the transaction. Not only will the contracts of the target date back several years but also they will show no uniform use of dispute resolution mechanisms.The target’s multiple contracts will typically contain a diverse mix of arbitration agreements referring to different arbitration rules and venues and choice-of-jurisdiction clauses. In certain areas and depending on the affected jurisdiction, the target may not even have a choice to influence the dispute resolution mechanism since the dispute is subject to the mandatory jurisdiction of specific state courts as in labour or IP disputes. Obviously, this situation is much more difficult to resolve and requires even more thought when negotiating the dispute resolution clause of the SPA.

Joinder and consolidation in international arbitration

The arbitration rules of the leading arbitration institutions address in detail multiparty and multi-contract situations, especially with regard to the nomination of arbitrators. Although many rules contain provisions on joinder and consolidation, there are no uniform standards.10

The ICC was the first among the leading arbitration institutions to significantly expand the provisions on multiparty and multi-contract situations in its arbitration rules. The 2012 rules revision introduced new provisions in Article 7 et seq., which in part adopted the previous practice of the ICC Court and in part brought in innovations.11

Joinder of third parties

According to Article 7.1 of the ICC Rules, a party to a pending ICC arbitration may join an ‘additional party’ by filing a request for joinder. A joinder requires, however, that the requesting party brings a claim against the additional party.12 It is generally insufficient to merely reserve the right to potentially bring claims against the additional party, depending

9Other typical M&A disputes relate to the validity and rescission of the contract, see, for example, Fischer/ Walbert,‘The Arbitration Agreement and Arbitrability, Efficient and Expeditious Dispute Resolution in M&A Transactions’, AustrianYearbook on International Arbitration, 2017, 21, 39.These types of disputes usually do not have a multiparty or multi-contract component beyond the parties to the SPA.

10See, for example, with respect to joinder,Article 7 of the ICDR Rules;Article 22.1(viii) of the LCIA Rules; Article 13 of the SCC Rules;Article 7 of the SIAC Rules;Article 4.2 of the SCAI Rules;Article 17.5 of the UNCITRAL Arbitration Rules;Article 19 of the DIS Rules and, with respect to consolidation,Article 8 of the ICDR Rules;Articles 22.1(ix)–(x) and 22.6 of the LCIA Rules;Article 15 of the SCC Rules;Article 8 of the SIAC Rules;Article 4.1 of the SCAI Rules;Article 8 of the DIS Rules.

11Verbist/Schäfer/Imhoos, ICC Arbitration in Practice, 2015, 52 et seq.; Fry/Greenberg/Mazza, The Secretariat’s Guide to ICC Arbitration, 2012, 3-287.

12Article 7.2(c) of the ICC Rules.

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Joinder and Consolidation in M&A Arbitration

on the outcome of the original dispute between the existing parties, or to pursue conditional claims.13 The request can only be made prior to the confirmation or appointment of any arbitrator, unless all parties including the party to be joined agree.14

Most notably, a party may only request the joinder if there is an ICC arbitration agreement with the additional party that establishes the jurisdiction of an arbitral tribunal under the ICC Rules.15 Otherwise, the ICC Court may decide that the arbitration may not proceed against the additional party16 or the arbitral tribunal may decide it has no jurisdiction regarding the additional party.17 If there is an ICC arbitration agreement with the additional party contained in a different contract, a joinder is still possible pursuant to Article 9 of the ICC Rules.18 In particular, to let the case proceed against the additional party, the ICC Court must be prima facie satisfied that the arbitration agreement with the additional party is ‘compatible’ with the arbitration agreement between the existing parties and that all parties may have agreed to a single arbitration.19 Two ICC arbitration agreements are, for example, incompatible if they provide for a different number of arbitrators or different places of arbitration.20 The parties are able to rectify inconsistencies by entering into a subsequent agreement.21

Under the arbitration rules of other arbitration institutions, including the Singapore International Arbitration Centre (SIAC), the Swiss Chambers Arbitration Institution (SCAI) and theVienna International Arbitration Centre (VIAC), the provisions on joinder are more flexible.22 For example, a request for joinder may be filed not only by an existing party but also by a non-party wishing to participate in pending proceedings.The decision on such joinder is made taking into account ‘all relevant circumstances’, which allows flexibility.23

13Verbist/Schäfer/Imhoos, ICC Arbitration in Practice, 2015, 54; Fry/Greenberg/Mazza, The Secretariat’s Guide to ICC Arbitration, 2012, 3-302.

14Article 7.1 sentence 4 of the ICC Rules.

15Article 7.1 sentence 3 of the ICC Rules.

16Article 6.4 of the ICC Rules.

17Article 6.5 of the ICC Rules;Verbist/Schäfer/Imhoos, ICC Arbitration in Practice, 2015, 50, 52, 54; Fry/ Greenberg/Mazza, The Secretariat’s Guide to ICC Arbitration, 2012, 3-319;Voser, Overview of the Most Important Changes in the Revised ICC Arbitration Rules,ASA Bulletin 2011 Issue 4, 792, 794, 797.

18Article 7.1 sentence 3 of the ICC Rules.

19Article 6.4(ii) of the ICC Rules.

20Fry/Greenberg/Mazza, The Secretariat’s Guide to ICC Arbitration, 2012, 3-243.

21Fry/Greenberg/Mazza, The Secretariat’s Guide to ICC Arbitration, 2012, 3-247.

22Dulac/Lo,The SIAC Rules 2016: New Features, Indian Journal of Arbitration Law,VolumeV 2016 Issue 2, 129, 131; Schramm, in Arroyo (ed), Arbitration in Switzerland:The Practitioner’s Guide, 2013, Chapter 3, Part II, Article 4 para. 36. Other arbitration rules are more restrictive, for example Article 17.5 of the UNCITRAL Arbitration Rules requires that the third party to be joined is party to the same arbitration agreement between the original parties (Jan Paulsson/Petrochilos,‘UNCITRAL Arbitration, 2017’, Part I, Section III, Article 17 para. 41; James Castello, in: Mistelis (ed), Concise International Arbitration, 2015, Part II, UNCITRAL Arbitration Rules, Section III,Article 17 para. 10).

23Article 7.1 of the SIAC Rules;Article 4.2 of the SCAI Rules;Article 14.1VIAC Rules.

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Joinder and Consolidation in M&A Arbitration

Consolidation

With respect to the consolidation of two or more arbitration proceedings, Article 10 of the ICC Rules provides that the ICC Court may consolidate cases into the case that commenced first if one of the three options listed under sentence 1(a) to (c) is met. Cases may be consolidated if all parties agree24 or the claims in the different proceedings are made under the same arbitration agreement.25 Furthermore, in the event the claims arise from more than one arbitration agreement, the ICC Court may consolidate them if they are between the same parties, the disputes relate to the same legal relationship and the arbitration agreements are compatible.26 The ICC Court considers in particular whether the same or different arbitrators have already been confirmed or appointed.27

The rules of many other arbitration institutions on the consolidation of arbitration proceedings are comparable to the ICC Rules.28 Under, for example, the arbitration rules of the Stockholm Chamber of Commerce (SCC), the SIAC and the SCAI, however, there is no requirement that the parties to the two proceedings be identical.29

Multiparty and multi-contract transactions

In M&A transactions with multiple parties but only one SPA, there is typically only one arbitration agreement, either directly in the SPA or attached to it in an appendix.An arbitration agreement between the parties to the SPA usually includes the purchasers and the sellers and potentially further parties such as guarantors.

Multiparty contexts within the SPA

The arbitration agreement of the SPA usually enables the parties to bring multiple claims under it against multiple respondents within one arbitration. Depending on the applicable arbitration rules, cases could be consolidated if a claimant initiates multiple proceedings

24Article 10 sentence 1 (a) of the ICC Rules.

25Article 10 sentence 1 (b) of the ICC Rules.

26Article 10 sentence 1 (c) of the ICC Rules.

27Article 10 sentence 2 of the ICC Rules.

28Article 8.1 of the ICDR Rules;Article 22.1(ix)–(x) of the LCIA Rules;Article 15.1 of the SCC Rules; Article 8.1, 8.7 of the SIAC Rules; Dulac/Lo,The SIAC Rules 2016: New Features, Indian Journal of Arbitration Law,VolumeV 2016 Issue 2, 129, 141. Similar to the ICC Rules, some arbitration rules also consider if the same or different arbitrators have been confirmed or appointed, for example,Article 8.3(b) of the ICDR Rules;Article 22.1(x) of the LCIA Rules and Articles 8.7(b) and (c) of the SIAC Rules even prerequisite

for a consolidation that no or the same tribunal has been constituted in the other arbitrations. Some rules also provide for additional circumstances which can be taken into account, for example ‘the progress already made in the arbitrations’ under Article 8.3(c) of the ICDR Rules and similarly Article 4.1 of the SCAI Rules (Boog/Raneda,The 2016 SIAC Rules:A State-of-the-Art Rules Revision Ensuring an even more Efficient Process,ASA Bulletin,Volume 34 2016 Issue 3, 584, 594) or ‘the efficiency and expeditiousness of the proceedings’ pursuant to Article 15.2(ii) of the SCC Rules. Regarding the LCIA Rules, see Scherer/ Richman/Gerbay,Arbitrating under the 2014 LCIA Rules:A User’s Guide, 2015, Chapter 16, para. 33.

29Dulac/Lo,The SIAC Rules 2016: New Features, Indian Journal of Arbitration Law,VolumeV 2016 Issue 2, 129, 141; Schramm, in Arroyo (ed), Arbitration in Switzerland:The Practitioner’s Guide, 2013, Chapter 3, Part II,Article 4 para. 5. In contrast thereto and in accordance with the ICC Rules Article 8.1(c) of the ICDR Rules;Article 22.1(x) of the LCIA Rules.

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