How to draft an effective M&A dispute resolution clause
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This article is written by Shubham Rajput, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.

Introduction 

In a merger and acquisition transaction, a dispute resolution clause is one of the most heavily negotiated clauses. Parties show all their tricks and flare in trying to reserve their right to approach courts and the choice of their jurisdiction. In the rush to get the desired route to courtrooms, one vital aspect of dispute resolution is often missed. It is the mechanism of the dispute resolution clause which is critical and should be well negotiated in an M&A transaction. The parties should first explore a different mechanism to solve the future dispute and should choose the one which is more beneficial for them. 

What is a dispute resolution clause?

In an M&A transaction when companies come together to embark upon a new business journey. This newly formed relationship is based on a contract. A dispute resolution clause forms one of the essential parts of that contract, this clause deals with the mechanism to deal with and resolve future disputes that might arise between the parties regarding the contract. The dispute could be a contractual dispute or a non-contractual dispute. A well-drafted dispute resolution clause should envisage all possible situations of dispute and provide for a mechanism to resolve such a dispute.  

Making the right choice

While drafting a dispute resolution clause having a one size fit treatment would often lead to a cumbersome clause giving one mechanism for different kinds of disputes. A recent study in the United States has shown that a dispute resolution clause in an M&A transaction majorly decides three things:

  1. a) Choice of Forum (80% of Public deals & 73% of Private deals)
  2. b) Choice of Law (55% of public deals & 22% of private deals)
  3. c) Arbitration clause (2% of public deals & 20% of private deals).

It was also observed that one dispute resolution mechanism was adopted for one contract making it applicable for all kinds of disputes that might arise out of that contract and the mechanism is mostly restricted to two approaches that are litigation or arbitration. 

Methods of dispute resolution 

There are various kinds of dispute resolution mechanism available to parties which can be broadly bifurcated into two parts:

a) Non-binding form of dispute resolution mechanism

It includes those methods of dispute resolution which do not result in a binding resolution of disputes. In other words, the outcome of the machine, unlike a judgment of a court or an award of a tribunal, is not binding on the parties. Here parties only have a moral obligation to abide by the final decision of the dispute resolution process.

i) Negotiation

It is a kind of an alternative dispute resolution mechanism where parties sit with each other with or without their legal counsels and an attempt is made to resolve the dispute outside court. In such a process parties talk directly to each other and legal counsels, if present, would help only in the legal matters involved. 

ii) Mediation

In this process as well, parties sit with each other outside court in the presence of an independent third party that is the mediator who facilitates the whole conversion process between the parties, so that the parties can reach a solution. Mediation as a binding form of dispute resolution is slowly and gradually taking shape with the signing of the Singapore Convention on Mediation 2019, which came into force on 12th September 2020. As of now, 6 states have ratified it, which includes Singapore, Saudi Arabia, Qatar, Fiji, Ecuador, and Belarus.

b) Binding form of dispute resolution mechanism 

It is where the outcome of the dispute is binding on parties to the dispute and parties have a legal obligation to abide by it. This includes the highly contested two ways of dispute resolution mechanism that is litigation and arbitration. 

i) Litigation

It is the most commonly used dispute resolution mechanism where national courts are called upon to resolve the dispute between the parties under the law of the land.

ii) Arbitration

It is another binding form of dispute resolution mechanism but more flexible than litigation as parties are free to choose the arbitrators, the applicable law, and the seat of such arbitration.  

Considerations in litigation

1) Right to appeal

In an arbitration proceeding the award is binding on the parties but parties lose their right to appeal whereas in litigation this right is kept intact. The court of laws works on the principle that judges are not infallible and therefore at least one right to appeal is given almost as a matter of right. This is one of the many reasons that parties opt for litigation. 

2) Cost

Although arbitration is theoretically a cost-effective process and parties have to spend less but in practice, it can be the opposite as well. Often it is seen that parties end up spending much more than they would do in litigation. As the parties end up paying for the arbitrators, counsels, experts, etc.   

3) Law vs. Equity

It is settled that courts in India or various commonwealth countries are also courts of equity and go beyond the realms of law to do complete justice especially in the Indian context the constitutional courts that are High Courts and Supreme Court. The Supreme Court of India specifically has a provision under Article 142(1) of the Constitution to administer complete justice and in effect empowering the courts to act as a court of equity. An arbitration tribunal cannot go beyond the realms of law that the parties have decided to be the applicable law under the contract.   

3) Time factor

It is a settled fact that litigation eats up time and the last thing that companies and businesses want in a dispute is a prolonged resolution process. 

Considerations in arbitration 

1) Parties to be identified

The parties to the arbitration agreement should be identifiable and mentioned in clear terms. It more often happens that when an arbitration agreement is part of the main commercial agreement all the parties mentioned in the commercial agreement automatically become parties to the arbitration agreement. Therefore, the rights and liabilities of the parties should be determined and, if possible, a separate arbitration agreement should be drafted mentioning all the relevant parties. 

2) Specify an Arbitral Institution

If it is not that essential to go for an ad hoc arbitration, specify an arbitral institution. It is preferred to go for an arbitral institute than an ad hoc arbitration in India because the latter follows Indian court practices which are not in conformity with the International standard practices in arbitration. 

3) Specify the seat and the venue clearly

The intention of the parties as to the seat and the venue of the arbitration should be laid down in black and white. Any ambiguity as to the “seat” with that of the “venue” can turn out to be a time-consuming and costly affair. Especially when the governing law is Indian then this confusion can delay the enforcement of the award by many years in litigation. 

4) Procedure for appointing arbitrators

Arbitrators can be called the soul of the arbitration proceeding and therefore parties should choose to agree and define the proper selection procedure of an arbitrator. The Arbitration and Conciliation Act, 1996 under Section 11 allows parties to agree on the procedure to appoint arbitrators. Both parties must reserve their right to choose one arbitrator and leave one with the arbitral institute. This will allow confidence in the arbitration proceedings and parties would easily accept the arbitral award. 

5) Binding connected persons

When the commercial agreement concerns a body corporate or a company, the arbitration agreement needs to include all the concerned persons. It often happens that the directors of the principal officers of the company or the firm are not specifically mentioned in the commercial agreement and they can refuse to submit to the arbitration agreement. Therefore specifically making all the concerned persons whose rights and obligations are affected a party to the arbitration agreement becomes important. 

6) Subject matter of the arbitration agreement

It is a sine qua non to make it very sure that the subject matter of the dispute is arbitrable. There are certain statutory rights that the parties might have under the commercial agreement and the arbitration tribunal would not be competent to deal with it. For example, a creditor might approach NCLT in case of a default under the IBC, 2016, seeking winding up of the company but the arbitration tribunal would not be competent to order winding up of the company.    

Conclusion

In an M&A transaction, dispute resolution is a difficult process as there are complex business transactions involved. These transactions require parties to unravel the dispute from a variety of M&A models that are merger, acquisition or joint venture, etc. These disputes also have a significant effect on the health of the economy therefore the dispute resolution clause of such transactions needs to be drafted with utmost attention and planning. Parties can go for a single dispute resolution mechanism for the whole contract and parties can also adopt strategically negotiated dispute resolution mechanisms where they identify various likely disputes and provide a suitable mechanism for them. For example, a lighter breach should have a mandatory negotiation or mediation clause before parties could approach for courts or arbitration. 

References

(i)https://gowlingwlg.com/en/insights-resources/articles/2018/what-should-a-dispute-resolution-clause-say/.

(ii) https://www.cravath.com/a/web/510/3376762_1.pdf. 

(iii) https://www.singaporeconvention.org/events/scm2020

(iv)https://www.bloombergquint.com/law-and-policy/often-the-supreme-court-is-neither-right-nor-final-chintan-chandrachud.  

(v) https://warwick.ac.uk/fac/soc/law/elj/lgd/2015-1/kansal/lgd_2015_1_kansal_pdf.pdf


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