Материал: Amy C Kläsener

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Conflicts between Expert Determination Clauses and Arbitration Clauses

in accordance with specified measures, and the final price will be set accordingly. The more successful a company, the higher the variable component payable by the buyer to the seller is.

In theory, at least, the interests of the buyer and seller become aligned.At first the seller will want the highest possible price, whereas the buyer will want to pay as little as possible. However, once the buyer owns the company, it will have every interest in the company’s commercial success. That success will increase the variable component of the price and benefit the seller as well. In practice, in price adaptation disputes, parties may argue about the company’s subsequent success and the contractual measures for evaluating that success.

Earn-out provisions also feature in agreements for the sale of a stake in a company.The seller will sell some shares and grant the buyer an option to purchase further shares later. The price will be set on the basis of the original sale price as adjusted in light of the company’s subsequent performance.43

Although the principle is easily stated, its application may prove difficult in practice. The ‘success’ of a company may be measured differently.The parties may disagree on which valuation method to apply, with one side preferring, for instance, the broadly accepted discounted cash flow (DCF) method, and the other preferring earnings-based valuation or even book value.44 Even where parties agree on a method, its application can still be contentious. For instance, if parties opt for the DCF method, they may still disagree on the various elements determining the applicable discount rate or the acceptable time frame in which to expect future cash flows. Parties can also disagree on the validity of the information provided by the company.They can argue over the relevance of the accounting principles used, the correctness of the accounts and the calculation of relevant periods. Further, the application of an earn-out clause requires continuity of management procedures during the reference period to prevent a buyer from manipulating the results, for example, by modifying a previously agreed business plan to increase charges during the reference period and delay earnings until after the end of the reference period.45 Parties often refer disagreements to expert valuers.

Partnership shares and minority shareholdings

Parties may appoint an expert not to adjust but to determine the purchase price of a company or stake in it, where the buyer and seller cannot reach agreement. This sometimes happens where the value of shares in a small company that is not listed is difficult to assess. Similarly an expert may be appointed to value a partnership share, where a partner wishes to leave the partnership and withdraw an equity share from it.46

43V Triebel, op. cit. 4, 129.

44A discussion of the full range of valuation techniques goes beyond the scope of this Article. On valuation techniques in general, see T Koller, M Goedhart, D Wessels, Valuation: Measuring and Managing the Value of Companies, 2015.

45W Peter,‘Arbitration of Mergers and Acquisitions: Purchase Price Adjustment Disputes’, in Arbitration International,Vol. 19, No. 4, 2003, 499.

46J Kendall, op. cit. 4, Section 3.3-1.

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Conflicts between Expert Determination Clauses and Arbitration Clauses

Representations and warranties

Experts sometimes determine disputed claims under representations and warranties.47 While ‘representations are statements of past and existing facts’, warranties are ‘promises that existing or future facts are or will be true’.48 The disputed content of representations and warranties is not necessarily a matter of valuation. The expert will consider what exactly the seller represented or promised to the buyer. Claims under representations and warranties often involve contractual interpretation and factual assessments beyond the analysis of financial data. Further, it will be necessary to determine whether the facts relied on by the buyer fall within the scope of a warranty claim.While such claims may be referred to expert determination, they are often left to arbitrators or courts.

Competing dispute resolution mechanisms

An arbitral tribunal’s jurisdiction will typically be broad, while an expert’s authority will be narrow.The relationship between arbitration and expert determination clauses will depend on the terms of the contract.49 This makes generalisations difficult. Parties may adopt a number of different approaches.They may provide for certain issues to be referred exclusively to expert determination and, in doing so, carve out an exception to the broad jurisdiction of an arbitral tribunal.Alternatively, they may provide for a tiered provision, where a matter must first be referred to expert determination and then subject to review by an arbitral tribunal. It is also possible for a dispute resolution provision to leave the parties with a choice of referring a matter to either an expert or arbitral tribunal. In that case, an arbitral tribunal would have the authority to decide any matter that might equally be referred to expert determination, in addition to any other dispute arising under the M&A agreement and covered by the arbitration agreement.50

In international disputes, an arbitral tribunal and state court, or one of several arbitral tribunals, sometimes concurrently assert jurisdiction over the same matter. Parallel proceedings before an arbitral tribunal and expert cannot arise in the same way. Unlike arbitral tribunals, experts do not have Kompetenz-Kompetenz (the authority to determine their own jurisdiction).51 This is consistent with the role of an expert as a valuer rather than a legally

47V Triebel, op. cit. 4, 129.

48R Tschäni,‘Post-Closing Disputes on Representations and Warranties’, in ASA Special Series 24, 2005, 68, with references. For a list of some typical representations and warranties in M&A transactions, see R Gersbach, A Gallman, Der Unternehmensjurist – Ein Handbuch für die Praxis, 2016, 184, 185.

49See, for instance, the decision of the Swiss Supreme Court ATF 117 Ia 365 c. 5b; and F Bohnet, L Droese,

Präjudizienbuch ZPO, 2018, para. 3.

50Under French law, the question also arises as to the relationship between expert determination under

Article 1843-4 CC, which is a mandatory provision, and an arbitration clause. In 2018, the Court of Cassation held that although Article 1843-4 CC is a provision of French public policy that cannot be excluded by contract, it does not operate to render an arbitration agreement manifestly void and inapplicable.Therefore, even for matters normally devolved to an independent expert by operation of that mandatory provision, the arbitral tribunal is allowed to examine its jurisdiction under the arbitration agreement, see G Stephens-Chu, N Bellec,‘French court rules that mandatory expert determination provisions do not render arbitration clauses inapplicable’, 2019, pp. 1, 2, which comments on the decision of the Court of Cassation, 10 October 2018, No. 16/22215.

51Barclays Bank Plc v. Nylon Capital LLP [2012] Bus. L.R. 542, at para. 23 (for the position under English law); M Valasek, F Wilson, op. cit.12, 69, 70 (for the position in common law jurisdictions).

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Conflicts between Expert Determination Clauses and Arbitration Clauses

qualified adjudicator. Decisions by experts as to the scope of their mandate are subject to review and not binding in the way arbitral awards or court judgments are. Nor would a court likely be disposed to accord them the authority that it would a jurisdictional award rendered by a competent arbitral tribunal.

There is not so much a danger of competing judgments or satellite proceedings but rather the difficulty that the expert’s mandate is very narrow. Experts cannot make binding rulings on objections to their authority.Whether, and to what extent, experts can determine questions of law – such as contractual interpretation – will depend on the law of the jurisdiction and may even be a matter of doctrinal controversy within that jurisdiction.52 Sometimes a respondent to an expert determination will start court or arbitral proceedings to establish that a reference does not fall within the scope of the expert’s authority, either because the referring party has misconstrued the expert determination agreement or because it has misrepresented the matter referred and wrongly brought it within the expert’s mandate. Conceivably, a respondent to an expert determination might also seek an injunction from an arbitral tribunal blocking the expert determination pending the tribunal’s binding decision. In making these arguments, the respondent may be concerned to avoid the cost and effort of participating in an expert determination that it did not agree to. It may also have a tactical, if less than proper, interest in using parallel proceedings to delay and complicate the resolution of a dispute.

Alternatively, either party to an expert determination may seek a preliminary ruling on a legal question raised in the referral but which only an arbitral tribunal would have jurisdiction to decide. In that case, the role of the tribunal will be to support and clear the way for the expert determination. This may raise practical difficulties where an arbitral tribunal has not already been appointed. Starting arbitral proceedings and appointing a tribunal may take weeks or months. An arbitral tribunal may be required to rule on the scope of an expert’s mandate, where the expert determination is already under way but not completed. In that case, the arbitral tribunal may also have to consider procedural efficiency and case management.The arbitral tribunal must decide whether it is better for an expert determination to proceed, with the risk that the expert’s decision will subsequently be found to be invalid, or for the expert determination to be interrupted pending a ruling by the tribunal. Depending on the terms of the expert determination and arbitration clauses, the tribunal might not only rule on the scope of the expert’s authority but also assume jurisdiction over and decide the substantive issue itself. In the English case of Barclays Bank plc v. Nylon Capital LLP,53 the Court of Appeal upheld a first-instance decision that an accounting expert did not have authority to determine a profit allocation under a partnership agreement.The claimant applied to the Court for a declaration that it was not required to make a payment to the respondent, who contended that the matter fell to an accounting expert for determination, and the accountant should proceed, subject to final review after

52For example, for the difficult position under Austrian law, see C Klausegger, op. cit. 4, 174; and for the various positions under Swiss law, see CR-CPC, P Schweizer, op. cit. 7, paras. 5 to 7, BK-ZPO, A Dolge, op. cit. 20, paras. 12 to 14, 40, B Berger, F Kellerhals, op cit. 20, paras. 150, 153, and P Carr, M Vischer,

Sinn und Unsinn von Schiedsgutachten bei M&A Streitigkeiten, which comments on the Swiss Supreme Court Decision 4A_428/2015, in Der digitale Rechtsprechungs-Kommentar, 2016.

53Barclays Bank Plc v. Nylon Capital LLP [2012] Bus. L.R. 542 (2011), [2011] EWCA Civ 826.

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Conflicts between Expert Determination Clauses and Arbitration Clauses

the determination was complete. In the leading judgment, Lord Justice Thomas adopted the following approach in relation to determining the scope of an expert’s mandate as distinct from the substantive issue referred to determination, which may also be relevant to arbitration:

The court has to determine first whether it is faced with a dispute which is real and not hypothetical and then if it is real, whether it is in the interests of justice and convenience to determine the matter in issue itself rather than allowing the expert to determine it first.54

As a starting point, a party must have a genuine interest in obtaining a ruling. Abstract determinations serve no purpose. For example, there is probably no value in ruling on an expert’s jurisdiction before a dispute has started, or before the referring party has set out its referral in detail. Whether a referral falls within an expert’s mandate may depend on the detail and may not be evident until the determination is under way. In Barclays v. Nylon, however, the scope of the expert’s authority turned on a straightforward point of contractual interpretation, which the court could easily decide as a preliminary matter and so prevent an unnecessary and unenforceable expert determination.

In other cases, it may be better for the expert determination to proceed. Expert determination should be an efficient procedure and would lose that efficiency if an expert were blocked by repeated legal challenges and objections.

Assuming that there is a real issue to be decided, the question becomes one of fairness and practicality.The following competing factors may be significant:

•the case management decisions of an expert, in particular whether the expert is willing to stay the determination pending a decision by the arbitral tribunal;

•any request by the parties or expert for legal guidance from the tribunal;

•the general desirability of expert determination to proceed efficiently and promptly as a means of alternative dispute resolution;

•the prejudice to the parties if the arbitral tribunal does or does not make a preliminary ruling;

•the efficiency of deciding the issue at a later stage, for example, in a challenge to the expert’s decision;

•the cost and complexity of the expert determination – it may be unacceptable for a major financial services firm or auditor to conduct a large-scale project, unless it is certain that the scope of the project complies with the terms of the contract;

•the relative efficiency and cost of deciding a preliminary issue – an arbitral tribunal may require two rounds of submissions to do so, whereas a simpler expert determination may be completed in a matter of weeks; and

•the possibility that all the parties will eventually accept the expert’s decision, even if it does not fall precisely within the scope of the mandate.

54 ibid., at para. 42.

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Conflicts between Expert Determination Clauses and Arbitration Clauses

These considerations apply to the case where an expert has exclusive authority to decide any matter properly referred under the contract.Where the expert’s authority overlaps with the jurisdiction of an arbitral tribunal and proceedings run in parallel, there may be a good argument for the tribunal to resolve all the issues, including those before the expert, in the interests of procedural economy.

Deciding challenges to an expert’s decision

Where a contract provides for both expert determination in relation to some issues, as well as a broad arbitration clause, such as a standard institutional clause, an arbitral tribunal will usually have jurisdiction to decide whether to set aside an expert’s decision.Where an arbitral tribunal does so, whether the arbitral tribunal should refer the matter to another expert determination or replace the expert’s decision with its own will depend on the contract and parties’ preferences.55

If the complaint requires technical substantive – as opposed to – procedural analysis, an arbitral tribunal, like a domestic court in a similar position, will face the difficulty of not having accountancy expertise. Parties would therefore do well to appoint an arbitrator – and indeed counsel – experienced in post-closing disputes, economically complex cases in general, possibly transactional work, or, at least, complex expert evidence.56 By contrast, the emergence of international M&A terminology and practices may make specialist knowledge of the governing law of the contract a lower priority.

In the case above, the arbitral tribunal will still need further expert evidence to assess the decision.Typically, the parties will appoint valuation experts as expert witnesses to assist the tribunal. A dispute between competing valuations leads to the appointment of one or more further valuers to act as experts, which results in yet more valuers becoming involved. Triebel wryly notes that, on occasion, financial experts apparently multiply miraculously.57

Before embarking on such proceedings parties should consider that the arbitral tribunal will depend heavily on expert evidence, which it may find a challenge to evaluate in reaching a decision.Where the result of an expert determination is contested the tribunal and parties will have to decide whether there should be a single tribunal-appointed expert or whether each party should appoint its own expert.The second approach is preferable. In particular, with a single tribunal-appointed expert, there is a danger that the tribunal will be over-reliant and too accepting of the expert’s opinion. Where a tribunal must choose between the views of two or more highly qualified experts, it will be forced to engage with their competing analyses and, more generally, may benefit from hearing different assessments of the same question.58 Sometimes, there is a practical difficulty in finding an expert more authoritative than the expert who undertook the original expert determination. If there is no one clearly senior to that expert in a small specialist field, where conflicts of

55R Tschäni, H Frey, D Müller, op. cit. 6, 111.

56ibid., at 43.

57V Triebel, op. cit. 4, 143.

58For a fuller discussion of the issues surrounding tribunaland party-appointed experts, see W Peter, ‘Party-Appointed Expert Witnesses v.Tribunal-Appointed Experts: Is there a Best Practice in International Arbitration?’, in Festschrift für Gerhard Wegen zum 65. Geburtstag, 2015, 719.

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