1. Introduction

If I had to sum up in just a few words John's most outstanding qualities as a lawyer and, alas, now former President of the ICC Court of International Arbitration - and what more fitting place than in this book in his honour? - I would mention competence, efficiency and transparency. These are the qualities for which John is praised by his peers and friends - and these are also the qualities he would expect in return.

Given his sympathy and talent for efficiency in the rule of law, one subject that might reward closer inspection is the tension between the different dispute resolution procedures that one nowadays finds running in parallel in complex M&A transactions.

One might observe that there should not be any such tension given that such contracts are most often drafted and negotiated by experienced M&A lawyers on both sides. Yet, arbitration practice shows that the contract drafting in this area is not always unambiguous, and is often incomplete. As a result, many arbitral tribunals faced with disputes arising from M&A transactions have to grapple with the precise demarcation between the different procedures. Often, those procedures run in parallel, while the parties argue that they are mutually exclusive. A crucial question therefore is who has jurisdiction to decide what and when.2


2. The different dispute resolution procedures in modern M&A contracts

Many modern M&A contracts provide for at least three different procedures:

1. Foremost, and almost de rigueur, such contracts contain a general arbitration clause referring any dispute between the parties arising out of or in connection with the M&A contract to arbitration. This is particularly true of cross-border transactions where arbitration clauses have become the rule and state court jurisdiction clauses the absolute exception. Whether the contract refers to institutional or ad hoc arbitration depends on the circumstances of the case and the legal backgrounds of the parties and their lawyers. In my experience, the majority of M&A contracts provide for institutional arbitration clauses rather than ad hoc, and the ICC seems to receive an ample slice of the cake. Those general arbitration clauses are rarely pathological, again because they are negotiated by experienced counsel. Typically, M&A contracts contain choice-of-law clauses. Most often they provide for the law of the seat of the target company or a neutral law and exclude conflict-of-law rules.

2. M&A contracts typically provide for expert determination in parallel with arbitration, to deal with specific questions of fact such as the correct value of guaranteed net equity or an EBITDA guarantee, or the proper price for a put or call option. Most of these clauses expressly state that the expert's findings are binding on the parties, but they do not always provide a detailed description of the procedure before the expert and its interaction with arbitration.3

3. Many modern M&A contracts have tailor-made arbitration clauses within material adverse change (so-called 'MAC') clauses. The main reason for including a MAC clause in the M&A contract is that these transactions require a certain period of time between the signing of the agreement and the closing, necessary for obtaining various approvals and often merger clearance from the relevant competition authorities. During this period, new circumstances may arise which could have a material impact on the transaction. Typically, the parties define what is to be considered as a MAC and its impact on the completion of the transaction. As any dispute between the parties over the existence of a MAC and its effect on the completion of the deal is time critical, most MAC arbitration clauses provide for non-institutional, fast track arbitration so that the dispute can be resolved swiftly.


Typically, the members of a MAC tribunal are agreed upon when the parties enter into the M&A contract. The arbitrators are required to be on standby during the period between the signing and the closing of the transaction. A tight timetable is foreseen for the MAC proceedings, leading quickly to an oral hearing in which the parties plead their case and present their evidence. The tribunal is then required to render its decision, often in summary form, within a few days of the hearing.

A typical MAC arbitration clause would read as follows:

If no agreement on the occurrence of a Material Adverse Change can be reached, then this issue shall be resolved by an arbitral tribunal consisting of [……….], as chairman and two further arbitrators jointly appointed by the Parties as soon as possible after the date hereof (the 'MAC Arbitral Tribunal'), all of whom have prior to the signing hereto declared or shall declare to the Parties that they accept such appointment and are and will remain independent (the 'Fast-Track Arbitration'). Should the Parties not be able to agree on two further arbitrators, [……] shall act as sole arbitrator. Either Party shall be allowed to initiate Fast-Track Arbitration by written notice to each arbitrator and the other Party specifying the underlying facts with regard to which disagreement on the occurrence of a Material Adverse Change has occurred and that a decision by arbitration thereof is required. Within seven days of such notification having been received by the other Party, both Parties shall submit their views on this issue in writing to the MAC Arbitral Tribunal with a copy to the other Party. Within a further seven days either Party has the opportunity to submit its response to the other Parties in writing to the MAC Arbitral Tribunal. Within a further seven days the MAC Arbitral Tribunal and the Parties shall convene (with participation by way of a videoconference being permissible for an arbitrator as well as for any Party representative) for an oral hearing. The MAC Arbitral Tribunal may admit as evidence only such documents, witnesses and expert witnesses that either Party can make available with its submissions (including written witness statements) at such oral hearing. Within three days after conclusion of the oral hearing the MAC Arbitral Tribunal shall render its decision. The MAC Arbitral Tribunal may give a summary decision only. Sections ____ [of the applicable national arbitration law] shall apply. For the avoidance of doubt, the Fast-Track Arbitration shall decide solely upon the question of whether or not a Material Adverse Change has occurred. Irrespective of whether it has been argued as a basis for such occurrence, the above Fast-Track Arbitration shall not decide upon a claim based on a breach of representations and warranties under this Agreement being justified or not. Until the MAC Arbitral Tribunal has rendered its decision, the Closing will be suspended and neither the Seller nor the Purchaser is entitled to terminate this Agreement pursuant to Section _____. The costs of the Arbitral Tribunal shall be borne by the Parties in equal parts.'


3. Interaction between the different dispute resolution procedures

3.1. Legal qualification

It should first be noted that the procedures foreseen in the general arbitration clause and the MAC arbitration clause both constitute arbitration. Even if some MAC arbitration clauses provide for an extremely fast-tracked procedure lasting as little as two or three weeks, it remains a genuine arbitration resulting in an enforceable award.

By contrast, expert determination is a different animal. It refers to experts called upon by the parties to intervene in the transaction and make binding decisions on specific matters, such as those mentioned earlier. This procedure is neither an arbitration nor a court proceeding, but follows the contractual rules set by the parties. The fact that it is a contractual procedure means that there are no binding procedural rules, no court support in the event of procedural incidents such as a challenge against the expert, and, most importantly, the expert determination does not constitute a decision directly enforceable in the same way as an arbitral award or a court judgment. The precise legal nature of the expert determination depends on the applicable law. For example, under German and Swiss law, it is referred to as 'Schiedsgutachten',4 under English law as 'expert determination',5 under US law as 'appraisal',6 under Italian law as 'arbitraggio'7 and under Dutch law as 'bindend advies'8 (binding advice). Dutch law comes into play relatively often, as many multinational companies, for tax reasons, are structured by means of Dutch holding companies. Expert determination is much less settled under French law and, although perfectly admissible as a matter of contract law, is viewed critically by prominent scholars.9

Common to most jurisdictions is the understanding that the customary wording 'final and binding' used in contracts to describe the effect of the expert determination at law does not necessarily mean that it cannot be challenged. The various laws all more or less concur that the expert determination can be challenged if the result is manifestly wrong.10 However, a party wishing to challenge an expert determination for being manifestly wrong should be aware that a relatively high threshold is set, again depending on the applicable law. The challenge must be made before the arbitral tribunal (or the competent court [Page367:] in the absence of an arbitration clause), and the task of the tribunal will be limited to deciding whether the expert determination was manifestly wrong. If it decides that it was not, the expert determination is (definitively) binding and the beneficiary party may request that the tribunal render an award confirming the expert's finding and, more to the point, order the other party to pay the sums due according to the expert's findings.

3.2. Proper demarcation between the procedures

Given the differences in the legal nature and scope of the parallel dispute resolution procedures, it is important that they be clearly demarcated from one another. Typically, the general arbitration clause will separate out disputes between the parties that are covered by expert determination on the one hand, and those covered by the MAC arbitration clause on the other. The clause might thus read:

Except for any disputes as to … referred to expert determination as per Section … above, and any disputes referred to MAC arbitration as per Section … above, all disputes arising out or in connection with the present contract shall be finally settled by arbitration under the Rules of …'

While the proper demarcation between the MAC arbitration and general arbitration would not appear to be problematic, this cannot be said of the interaction between expert determination and arbitration. This is chiefly because the parties fail to define the 'procedural' rules governing the expert determination. Unlike arbitration, where it is not necessary to confirm that the parties will be treated equally and each have an opportunity to be heard, as this is the 'magna carta' of arbitration, embodied in all modern arbitration laws,11 expert determination is not build on such clear procedural principles. As a consequence, it is not uncommon for parties to argue with one another and with the expert over whether the expert has violated due process - for example, by interrogating one party in the absence of the other. To avoid such disputes, which can be very disruptive, parties would be well advised to define clearly the procedural framework for expert determination, as in the following example:

If, after Seller has raised, within the time allowed, written objections to the Effective Date Accounts (herein 'Objections'), and Seller and Purchaser cannot agree on the changes to the Effective Date Accounts within four (4) weeks following the delivery of the Objections to Purchaser, each of Seller and Purchaser shall be entitled to refer such dispute for decision to an independent international leading firm of public accountants (big five) other than Seller's Auditor and Purchaser's Auditor (herein 'Expert'), which shall determine the correct amount of _____ [for example: the Intercompany Debt, the Financial Debt, the Cash and the Working Capital], if and to the extent that there are differences between the positions of Seller and Purchaser and within the limits set by Seller and Purchaser. If the Parties cannot agree within two (2) weeks on the person of the Expert, the [fill in [Page368:] the appointing authority] shall appoint such Expert. The Expert shall decide as expert (and not as an arbitrator) on the issues in dispute in accordance with the principles set out in Section ____ above. The Expert shall give Sellers and Purchaser adequate opportunity to present their views in writing and at a hearing or hearings to be held in the presence of Sellers and Purchaser and their advisors. The Parties shall jointly instruct the Expert to deliver its written opinion to them no later than four (4) weeks after their outstanding differences are referred to it. The Expert shall give reasons for its decision in writing and on all issues which are in dispute between Sellers and Purchaser. The costs and expenses incurred by the Expert shall be borne equally by Sellers and Purchaser. The Effective Date Accounts as determined by the Expert shall be final and binding on the Parties. Each Party shall give the Expert full access to information required for its decision.

Alternatively, parties may refer to existing institutional rules, such as the ICC Rules for the Administration of Expert Proceedings.

3.3. Expert determination and arbitration are mutually exclusive

Parties are not always aware that, in both the civil and common law systems, when a matter is contractually referred to expert determination, this deprives the arbitral tribunal (or state court) of jurisdiction. Under German and Swiss law, this is known as Ausschlusswirkung,12 meaning mutual exclusion. Hence, if a party were to start an arbitration, in which it brought a claim based on facts that were the subject of contractually agreed expert determination (e.g. a claim for a reduction in the purchase price on grounds of an alleged shortfall in the target company's net equity), the request for arbitration would have to be dismissed as not admissible, or at least premature. It is only once the expert determination has been made that arbitration can be commenced, and only then with a request for the expert determination to be declared non-binding because of manifest errors.

3.4. Demarcation problems in practice

In practice, there are two situations in particular in which the demarcation between the scope of expert determination and arbitration causes problems. The first is where the parties disagree over whether the contractual requirements for triggering the expert determination have been met; the second is when the parties disagree in their understanding of certain valuation criteria to be applied by the expert. Both situations occur more often than one might expect.

3.4.1. Are the requirements for triggering expert determination met?

It is not always entirely clear upon which documents the expert's work is to be based. For example, in a recent ad hoc case the Share Purchase Agreement provided that the Final Total Sales Price ('FTSP') [Page369:] was to be agreed on the basis of the Closing Accounts of the target company at a certain date. Since control over the target company was to be transferred to the buyer at an earlier date, it was agreed that the buyer would make an FTSP proposal on the basis of Closing Accounts to be established by the buyer and that the FTSP proposal would be communicated to the seller for it to review and make any objections in light of financial documents to be handed over to the seller. In the event that the parties could not agree over the seller's objections within a certain time frame, the Share Purchase Agreement provided that an expert should make a final and binding determination of whether or not the objections were justified.

A dispute subsequently arose between the parties over whether the documents submitted by the buyer were complete under the terms of the contract. The buyer took the view that it had submitted all the required documents and requested the expert to verify the seller's objections. The seller objected, arguing that the documents submitted by the buyer were incomplete and that the expert should therefore not start working on the determination. The expert nevertheless went ahead. Participating under protest, the seller requested the arbitral tribunal to (i) declare that any expert opinion rendered by the expert would not be final and binding on the parties and (ii) order the buyer to deliver the allegedly missing documents. The seller also requested the expert to stay the determination procedure until such time as the tribunal had rendered a decision on the document issue. The expert refused and proceeded to render an opinion, which the buyer did not accept, before the tribunal rendered its award. In the award, the tribunal declared that the expert determination was not binding on the parties as the buyer had indeed failed to deliver all the required financial documents. What a waste of time and money!

A more intelligent way of dealing with such a situation would have been for the parties first to request the arbitral tribunal to decide whether the financial documents were complete (which could have been done relatively quickly), thereby clarifying what documents should be made available to the expert to allow him to commence his work.

3.4.2. Who is entitled to interpret the ambiguous terms of an expert determination clause?

The second situation arises when the parties disagree on the proper meaning of a contract term they used when defining the expert determination procedure. For example, in a high-value institutional arbitration the parties differed in their interpretation of the term 'recurring items'. The buyer had raised several claims under an EBITDA guarantee, arguing that they all related to recurring items. In the buyer's opinion recurring items were items that had occurred once and consequently had an effect in subsequent years, whereas the seller took the view that recurring items had to occur not only once but on a recurrent basis in each subsequent year of the relevant period. Depending on which interpretation was followed, there was a [Page370:] EUR 220 million difference in the outcome. This was clearly a typical issue of contract interpretation, which fell squarely within the jurisdiction of the arbitral tribunal, rather than within the ambit of the expert determination. Fortunately, the parties were smart enough to find a joint solution on how to deal with the situation: they agreed to make a special arbitration agreement covering just the interpretation issue. The arbitral tribunal's task was to decide the correct interpretation of the contested term. Depending on the decision reached, the arbitral tribunal would either reject the Claimant's claims or instruct the experts how to proceed. The arbitration agreement provided in relevant parts:

2.2. The Arbitral Tribunal shall first determine whether or not the eight claims asserted under the EBITDA Guarantee with the Notification relate to 'recurring items' within the meaning of Section 8.2(a)(iii) of the SPAs, predicated on the assumption that the accounting mistakes alleged by Party A in the Notification have actually occurred, and it being agreed that the Arbitral Tribunal shall determine in this context the interpretation of the term 'recurring items' as agreed by the parties in the SPAs. If and to the extent the Arbitral Tribunal determines that the accounting mistakes alleged by Party A in the Notification do not relate to recurring items, the Arbitral Tribunal shall reject the claims asserted by Party A in the Notification by final (partial) award. If and to the extent the Arbitral Tribunal determines that the accounting mistakes alleged by Party A in the Notification relate to recurring items, the Arbitral Tribunal shall rule, setting forth its reasons, preferably by binding interim (partial) award or otherwise by procedural order - and the parties will accept such determination as binding - as to which alleged accounting mistakes relate to recurring items. The arbitration proceedings shall then proceed to the next stage, as further outlined below.

2.3. If and to the extent the Arbitral Tribunal determines that the accounting mistakes alleged by Party A in the Notification relate to 'recurring items', the Arbitral Tribunal shall instruct the appointed auditors pursuant to Section 3 of this Agreement to assess, as experts, with the guidance of the Arbitral Tribunal which shall be based on its preceding decision (pursuant to Section 2.2 last sentence) as to the determination of the exact questions, whether the accounting mistakes alleged by Party A in the Notification are due to 'evident mistakes' as otherwise set forth in Section 8.2(a)(iii) of the SPAs. If and to the extent that both auditors do not agree that the accounting mistakes alleged by Party A in the Notification constitute such 'evident mistakes', the Arbitral Tribunal shall reject the claims asserted by Party A in the Notification with respect to such alleged accounting mistakes by final (partial) award; if and to the extent that both auditors do agree that the accounting mistakes alleged by Party A in the Notification constitute such 'evident mistakes', the arbitration proceedings shall proceed to the next stage, as further outlined below.

2.4. With respect to the procedural stages described in Sections 2.2 and 2.3 above, the parties agree that within each such stage they may restrict their pleadings to those facts and evidence required to support the decision to be rendered at the end of the respective stage and that such restriction shall not preclude or restrict their pleadings under any subsequent procedural stage.


4. Conclusion

As the above examples show, the interaction between expert determination and arbitration and the demarcation between the two procedures are tricky issues. It is imperative that the contract be as precise as possible with regard to the scope and the rules governing each procedure. Yet, even with the best drafting, practical problems may still occur when the parties start to argue about whether a specific dispute falls within the competence of the arbitral tribunal or should be referred for expert determination. In such cases, it helps if the parties jointly clarify the rules of the game to avoid the cost and uncertainty caused by parallel procedures. In most cases, agreeing on a common approach will be in the interest of both parties.

Partner with CMS Hasche Sigle, Munich, Germany; Vice-President of the ICC International Court of Arbitration, 2009-2015; Klaus.Sachs@cms-hs.com.

Interestingly, the subject is programmed for a dispute resolution panel discussion at the 2015 IBA Conference in Vienna, which suggests that it is of topical interest.

Cf. A. Sessler & C. Leimert, 'The Role of Expert Determination in Mergers and Acquisitions under German Law' (2004) 20:2 Arbitration International 151; K. Sachs, 'The Interaction between Expert Determination and Arbitration' in G. Kaufmann-Kohler & A. Johnson, eds., Arbitration of Merger and Acquisition Disputes, ASA Special Series No. 24 (2005) 235.

See K. Sachs, supra note 2 at 236.

See M. Borowsky, Das Schiedsgutachten im Common Law. Ein rechtsvergleichender Beitrag zum Begriff der Schiedsgerichtsbarkeit (Nomos, 2001) at 191.

Ibid. at 191 et seq.

See Codice Civile, Art. 1349; M. Hartl, Das Schiedsgutachten im italienischen Recht (Herbert Utz, 1993) at 8.

See e.g. section 12 of the Netherlands Arbitration Institute (NAI) Arbitration Rules.

C. Jarrosson, La notion d'arbitrage (LGDJ, 1987) at 134, § 248.

See K. Sachs, supra note 2 at 235 et seq.

See e.g. Article 18 of the UNCITRAL Model Law on International Commercial Arbitration.

See D. Hochstrasser & S. Fuchs, 'Einleitung 12. Kapitel' in H. Honsell, N.P. Vogt, A.K. Schnyder, S.V. Berti, eds., Basler Kommentar, Internationales Privatrecht, 3d ed. (2013), § 298.