Материал: Amy C Kläsener
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Conflicts between Expert Determination Clauses and Arbitration Clauses
The expert’s role
It is sometimes difficult to distinguish the role of an expert from that of an arbitrator, who resolves parties’ disputes.12 Historically, the role of the valuer was to complete the parties’ bargain by setting a price, where they had not done so.13 That function could be distinguished from the function of a judge or arbitrator. In completing the parties’ bargain, the expert did not determine their rights under the contract.There was less a dispute between the parties than a difference as to price.The valuation was largely a matter of fact and not law. Depending on the applicable law, an expert’s authority to make legal findings may be limited. For example, under French and Swiss law, an expert may determine facts but not the legal consequences of a finding.14
These distinctions may arise in different forms in some jurisdictions, but they may be of only limited practical use in understanding modern expert determination.The difference between resolving a difference as opposed to a dispute was perhaps never entirely clear. It is hard not to see parties’ inability to set a price as a disagreement. Moreover, parties often refer valuation disputes to arbitration. Arbitrators are used to making complex economic determinations and are sometimes called on to set or adjust the price of a company or stake in it. In relation to valuation disputes, the key feature of expert determination is that the valuation of a company is not a matter of accurate bookkeeping but one that leaves the valuer with considerable discretion. As discussed below, the value depends on numerous parameters open to divergent interpretations.
Fast and authoritative?
The procedures of expert determination are very different from those in arbitration or other forms of adjudication. Experts are free to draw on their own knowledge rather than establishing exhaustive evidence and may not need to hear the parties on every substantive issue relevant to their decision.15 However, expert determination is not a ‘quick fix’ and the speed of a procedure will depend on the scope of a referral. There is a considerable difference between valuing a bank and deciding a narrow question under a representation or warranty in relation to a small business. Procedures in expert determination are often described as ‘informal’, meaning that an expert is not bound by rules of civil procedure or evidence but is free to take the initiative and adopt a more ‘inquisitorial, investigative approach’.16 As the English Court of Appeal noted,‘there is no procedural code for expert determination.’17 In a civil law jurisdiction, that inquisitorial approach may not of itself mark a significant departure from arbitral practice.
12For a discussion of this sometimes elusive distinction in common law jurisdictions, see M Valasek, F Wilson, ‘Distinguishing Expert Determination from Arbitration:The Canadian Approach in a Comparative Perspective’, in Arbitration International,Volume 29, Issue 1, 2013.
13A Kotb, op. cit. 10, 127; McHugh, 2.
14Court of Cassation, 16 February 2010, No. 09/11586 (on French law); N Erk, op. cit. 4, 173.
15A Redfern, op. cit. 9, 106.
16J Kendall, op. cit. 4, Section 1.1-2.
17Barclays Bank Plc v. Nylon Capital LLP [2012] Bus. L.R. 542, at para. 37.
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Conflicts between Expert Determination Clauses and Arbitration Clauses
A procedure driven by the factual knowledge of an expert rather than the legal and procedural expertise of an arbitrator brings with it compromises.Where parties deliberately opt out of the jurisdiction of courts in favour of an expert who is not legally trained, they cannot expect the same procedural standards as before well-run domestic courts or international arbitrations. It is suggested that the Singaporean courts rightly recognise that strict requirements of due process are at odds with the aims of expert determination.18
Minimum standards of procedural fairness vary according to jurisdiction.The English view is extreme:‘[T]here is no requirement for the rules of natural justice or due process to be followed in an expert determination in order for that determination to be valid and binding between the parties.’19 By contrast, French and Swiss law require minimum standards of procedural fairness.20
Expert determination can only proceed expeditiously where the questions referred to the expert are narrow and technical. Parties lose speed if they expand the referral to a broad issue of valuation, especially that of a large company, such as a bank.While parties sometimes need a binding decision within weeks to complete a transaction, in a complex case, a procedure may involve detailed terms of appointment, agreement on procedural rules, resolution of preliminary questions of law, provision of documents, possibly witness interviews and the provision of a draft report for comment by the parties, before the final report is issued.A timetable extending up to a year, as is common in larger arbitrations, may be appropriate depending on the complexity of the dispute.
Enforcing and challenging experts’ decisions
Once an expert has rendered a decision, its recognition and enforcement are usually a matter of domestic law.21 International parties should consider that there is no equivalent to the New York Convention.Where a party challenges a decision, the standard for setting it aside is high.The fact that a decision is wrong is not necessarily sufficient. 22 As a matter of policy, this is consistent with the notion that, in choosing expert determination, parties opt to rely on the expert to decide a matter.They must live with the outcome.
18M Valasek, F Wilson, op. cit.12, 82.
19Bernhard Schulte GmbH and Others v. Nile Holdings Ltd [2004] EWHC 977 (Comm), at para. 95.
20French case law tends to consider that experts must respect the principle of adversarial proceedings, see D Tricot et al., L’évaluation à dire d’expert prévue par l’article 1843-4 du code civil: Etat actuel de la jurisprudence, 2013, p. 16. Under Swiss law, experts must be independent and impartial, and it has been argued that the grounds for recusal of arbitrators apply by analogy to them (Art. 189 para. 3(b) cum Art. 367 et seq. CPC), see CR-CPC, P Schweizer, op. cit. 7, para. 13. Moreover, in making their findings and conclusions, experts
must respect the standard of due process, in particular equal treatment of the parties and the right to be heard (Art. 189 para. 3(c) CPC), see BK-ZPO,A Dolge, Basler Kommentar: Schweizerische Zivilprozessordnung, 2017, para. 52, and B Berger, F Kellerhals, International and Domestic Arbitration in Switzerland, 3rd ed., 2015, para. 158. See also R Tschäni, H Frey, op. cit. 6, 82.
21E Fischer, M Walbert, op. cit. 2, 43.
22For instance, under Swiss law, they ‘can only be invalidated by means of an ordinary procedure in which the Plaintiff must prove that the findings of the expert are manifestly unfair, arbitrary, incorrect or inequitable to a high degree, or has been based on false assumptions or even vitiated by defects in consent’, see
TF 4A_254/2011, c. 4.1, B Berger, F Kellerhals, op. cit. 20, para. 159 and BK-ZPO,A Dolge, op. cit. 20, para. 53; under US law, the standard is ‘fraud, bad faith or palpable mistake’, see Liberty Fabrics v. Corporate Props.Associates 5, 636 N.Y.S.2d 781 [1st Dept. 1996]; under French law, they can be reviewed in case of gross
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Conflicts between Expert Determination Clauses and Arbitration Clauses
Decisions may be set aside where the expert has materially departed from the parties’ instructions and acted outside his or her mandate. Parties appoint experts to resolve a specific problem or answer a particular question and, like any other contract debtor or obligor, the expert must perform that obligation – no more and no less. In extreme borderline cases, the question may arise whether experts have discharged their mandate so badly that they can be said not to have discharged it all, and their incompetence said to amount to a material departure from their instructions.23 This may arise where an expert has badly misunderstood the nature of a task, for example by applying the wrong accounting rules.
Some jurisdictions provide for experts’ decisions to be set aside where the expert’s valuation is badly wrong, in the sense of arriving at the wrong answer as opposed to having answered the wrong question.The standard will vary according to jurisdiction. In Austria and Germany, a decision may be set aside where it is obviously incorrect or inequitable. For the mistake to be obvious it must be easily detected. Beyond that it must be wrong by a margin of at least 10 per cent and, in practice, more likely 25 per cent to justify legal intervention.24 Such standards are indicative and allow for considerable discretion in their application. In Switzerland, the courts apply a similar standard of a deviation of at least 25 per cent.25 The English common law does not provide that a decision may be set aside for error,26 but parties often add a contractual term that an expert’s decision will be binding absent ‘manifest error’. For a decision not to be binding, the error must be easily detected and so clear as ‘to admit of no difference of opinion’.27 Irrespective of whether a standard is expressed in words or as a percentage, it risks giving a false impression of precision and may prove difficult to apply to valuations that depend heavily on judgements and assumptions, and leave the valuer considerable discretion.
Finally, any decision may be set aside for fraud. In a judgment of the English Court of Appeal, Lord Denning MR may be taken to have spoken on behalf of all civilised jurisdictions when he observed:‘Fraud or collusion unravels all.’28
mistake (erreur grossière), see Court of Cassation, 19 October 2017, No. 16-22660 (for Art. 1592, Civil Code [CC]) and Paris Court of Appeal, 10 April 2014, No. 13/22132 (for Art. 1843-4 CC); for German Law, see BGB §§317 and 318; V Triebel, op. cit. 4, 136, on legal review, 138, on no exclusion of ‘ordentlichen Rechtsweg’, 141 to 143; J Kendall, op. cit. 4, Sections 14.6-9 and 3.2-11 on ‘material departure from instructions’, Section 14.2-3 and 14.6-7 on ‘procedural unfairness’; C Klausegger, op. cit. 4, 173; C Freedman,‘Expert determination’, in ICC Dispute prevention and settlement, 2017, Section on legal errors, 9; Premier Telecom Communications Group Ltd, and Darren Michael Ridge v. Darren John Webb [2014] EWCA Civ 994, at paras. 8 and 9 (for a recent discussion by the Court of Appeal of the principles applicable to setting aside a decision under English law).
23The issue is addressed in the judgment of Lord Neuberger MR in Barclays Bank Plc v. Nylon Capital LLP [2012] Bus. L.R. 542 (2011), at paras. 62 to 66.
24C Klausegger, op. cit. 4, 174, 175.
25See the Swiss Supreme Court decision ATF 129 III 535, c.2.1.; R Tschäni, H Frey, D Müller, 111, op. cit. 6.
26J Kendall, op. cit. 4, Section 14.5.
27Veba Oil Supply & Trading GmbH v. Petrotrade Inc. [2001] EWCA Civ 1832, at para. 33; J Kendall, op. cit. 4, Section 14.11-2. Similarly, under Swiss law, the error must be ‘manifest’, which means that the deviation from the actual situation must be immediately obvious to any expert examining it carefully, see BK-ZPO,A Dolge, op. cit. 20, para. 53.
28Campbell v. Edwards [1976] W.L.R. 403 at 407.
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Conflicts between Expert Determination Clauses and Arbitration Clauses
The expert’s powers
Arbitral tribunals – at least those in seats that support the arbitral process – enjoy many of the powers of state courts to control and manage proceedings. By contrast, experts have little or no power to compel parties or witnesses.29 Nor can they order measures, such as the production of documents, against third parties.30 This may be a disadvantage where the expert determination agreement is between the buyer and seller, and the third party is the target company. By comparison, an arbitral tribunal might be able to compel production of documents from the target company where they are within the possession, custody or control of the buyer.31 Experts cannot usually order interim measures as arbitral tribunals routinely do. Consequently, parties to expert determinations need a measure of good will and trust for the procedure to succeed.32 The expert is vulnerable to disruptive behaviour.
Expert determination in M&A agreements
Parties choose to adopt expert determination in a range of transactions, including the sale of a company or a stake in it, the valuation of a partnership share or minority shareholding. It would equally be possible to refer any of the issues identified in this Section to arbitration or litigation.
In practice, the use of experts to value companies or shares in them or to set the final purchase price is particularly widespread.33 The price is a delicate feature of any transaction, and buyers and sellers have opposing interests. Moreover, major M&A transactions are so complex that the contract may not always be entirely clear as to the price adjustment mechanism. Combined with huge financial stakes, this may spawn disagreements.34
Occasionally, parties will agree to refer a complex valuation to an expert for binding determination before an opportunity for disagreement has arisen.35 More commonly, in M&A transactions, the expert’s role is limited to resolving contentious issues between the parties that arise after signing and before, or sometimes after, closing.The past decades have seen the emergence of international practices in M&A transactions and the adoption of prevailing Anglo-American terminology.36 A number of typical situations can therefore be identified in which buyers and sellers refer disagreements to a valuation expert irrespective of jurisdiction.
29V Triebel, op. cit. 4, 137.
30R Tschäni, H Frey, op. cit. 6, 84, on the position specifically under Swiss law.
31IBA Guidelines on the Taking of Evidence,Article 3.
32N Erk, op. cit. 4, 174.
33J Kendall, op. cit. 4, Section 3.4-1; R Tschäni, H Frey, op. cit. 6, 50.
34R Tschäni, H Frey, op. cit. 6, 60.
35ibid.
36M Schöll, Réflexions sur l’expertise-arbitrale en droit suisse, in ASA Bull. (24), 2006, 624; V Triebel, op. cit. 4, 126.
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Conflicts between Expert Determination Clauses and Arbitration Clauses
Completion accounts
Parties to an M&A transaction will sometimes agree a fixed price for a company, a ‘locked box’ transaction.37 This may be the case where a company is sold in a bidding process to institutional investors who require maximal certainty at the time of signing.38 No subsequent adjustment will then be possible. Quite often, however, the purchase price at the time of signing will be subject to subsequent adjustment.This happens, for example, where the parties agree at the time of signing to set the final purchase price by reference to financial statements reflecting the state of the target company on a future date, once closing is complete. The time lag between signing and closing may be attributable to the need to obtain regulatory approval, for example, from competition authorities, consent from third parties or confirmatory due diligence. The price payable at the time of signing will be based on recent historical accounts, which will no longer be current at the time of closing. Companies change over time. Between signing and closing, inventory may have been sold, loans refinanced or assets revalued.
A ‘completion accounts’ mechanism allows the parties to adjust the price once the updated accounts are available upon closing.39 In practice, parties may base any adjustment on, inter alia, net asset value, working capital, levels of indebtedness, a full profit and loss account, and changes in the value of stock.40 In our experience, adjustments based on changes to net asset value are particularly common.
Just as when they negotiated the provisional price, the parties’ interests are opposed, and there is ample scope for disagreement. Parties may disagree, for example, over applicable rules and principles, materiality standards or exchange rate fluctuations. When preparing the closing accounts, the buyer may decrease receivables and inventories, increase depreciation of fixed assets or create provisions for contingent liabilities, such as environmental risks. In contrast, the seller will seek to increase the value of balance-sheet items. In practice, the buyer’s valuation may be several times higher than the seller’s, yet the parties are working from essentially the same documentation and both may be supported by reputable experts in their analysis.41 This illustrates the role of judgement in the valuation of companies and, therefore, the subjectivity of any expert.
Earn-out clauses
Sometimes the purchase price of a company or stake in it will be defined by reference to the company’s future, post-completion performance.42 An earn-out clause will define both a fixed and a variable component of the price.The fixed component will be payable in any event.The variable component will depend on the company’s subsequent performance
37V Triebel, op. cit. 4, 129.
38J Kendall, op. cit. 4, Section 3.4-3.
39B Gross, op. cit. 3, 1; J Kendall, op. cit. 4, Section 3.4-3.
40J Almoguera,‘Practical remarks on some of the most common issues in M&A arbitration’, in Spain Arbitration Review (26), 2016, 72; J Kendall, op. cit. 4, Section 3.4-3.
41W Peter,‘Arbitration of Mergers and Acquisitions: Purchase Price Adjustment Disputes’, in Arbitration International,Vol. 19, No. 4, 2003, 497.
42J Almoguera, op. cit. 40, 72.
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