Regulatory risk
Local content requirements in Tanzania's petroleum sector
2024年4月9日
Dispute Resolution clauses: the case for international arbitration in cross-border M&A
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Market Insight 2024年4月30日 2024年4月30日
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非洲
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Regulatory risk
An essential requirement of any cross-border M&A contract is a clearly drafted dispute resolution clause. Without it, parties can end up spending a great deal of time and money arguing over how a dispute should be resolved, without making any real progress towards resolving it.
A key question when drafting such a clause is whether to resort to the courts or choose arbitration as the forum to settle disputes. In a cross-border transaction, specifying international arbitration can provide parties with the reliability, flexibility, and enforceability that may be lacking if they choose the courts of the local jurisdiction.
Dispute Resolution Clauses
Dispute resolution clauses are commonly included by parties to control and give certainty over the method of resolving a dispute should one arise. If a dispute cannot be resolved amicably, parties will often specify whether the dispute should be referred to arbitration (and, if so, the seat and set of rules), or litigation in the courts of a specified country.
Arbitration vs. Litigation
Like litigation, arbitration is adversarial in nature and the arbitration tribunal’s decision is final and binding. However, a tribunal's power to resolve a dispute between parties stems from the arbitration agreement between those parties, rather than being an automatic right in law.
The chosen forum is important as it will impact the procedure and cost of dealing with a dispute, and the ability to enforce the judgment once received. The relative importance of these factors increases in a cross-border situation where the parties are based in (and may have assets in) different countries, and one may gain an advantage from specifying a particular forum as having jurisdiction over the contract.
While the advantages of arbitration should be reviewed on a case-by-case basis against the wider context of the transaction, below are some of the typical benefits of specifying arbitration as the method of dispute resolution.
Benefits of international arbitration
| Enforceability |
One of the most significant advantages of arbitration over other forms of dispute resolution is its ease of enforcement. The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) requires the courts of contracting states to recognise and enforce arbitral awards made in other states (subject to specific limited exceptions). The New York Convention has a wide application with 172 contracting states at present. On the other hand, there is no global regime requiring the enforcement of court judgments. Many countries have entered agreements for reciprocal enforcement, but these are not as extensive as the New York Convention. In Tanzania, the Reciprocal Enforcement of Foreign Judgements Act R.E. 2019 provides for judgments from specified jurisdictions to be recognised and enforceable in the courts of Tanzania. The original list published in 1936 as a supplemental order comprised Lesotho, Botswana, Mauritius, New South Wales, Zambia, Seychelles, Somalia, Sri Lanka, Eswatini, Zimbabwe, and the United Kingdom. In a cross-border scenario, the enforcement of arbitration is particularly important. Where the parties are based in different countries, they can more easily enforce an arbitration award in the county where the other party's assets are held. Similarly, it can be key if the dispute arises in a country that does not provide a robust enforcement regime through the local courts. |
| Reliability |
Particularly in well-established seats such as London, Paris, or Singapore, arbitration is appealing due to its reliability and relative certainty. Many different countries have adopted the UNCITRAL Model Law or have arbitration laws based upon its provisions (such as England and Hong Kong), giving greater predictability to arbitration proceedings. As a result, parties can have a good idea going into the arbitration as to the procedure and its estimated duration and cost. In emerging markets, foreign parties can be reluctant to engage in the unknown quantity that is the local courts. The reliability of judicial systems can vary, with procedures that frequently suffer delays and lengthy appeal or enforcement processes. The judiciary may also be less experienced in dealing with complex international transactions and there are risks associated with literalistic, "black letter" approaches to law application and enforcement that are often found in these jurisdictions. |
| Flexibility |
Arbitration is flexible by nature, with parties able to tailor the procedure to their requirements. The parties can choose the rules that govern the arbitration and agree an efficient procedure that suits the dispute in question. The tribunal must also tailor the arbitration procedure to meet the needs of the case, ensuring that each dispute is dealt with adequately and proportionately. Parties also typically have discretion to elect the number of arbitrators that make up the tribunal and who those arbitrators are. This can help the dispute to be resolved proportionately and appropriately, for example by appointing a sole arbitrator for a lower value claim or by specifying an arbitrator with expertise that is relevant to the technical aspects of the dispute. There is also a great deal of flexibility in relation to evidence. Subject to any mandatory national laws of the arbitration seat, the parties are generally free to agree on how evidence should be adduced, presented, and examined. The only rule that a tribunal must comply with in relation to evidence is to act fairly and in accordance with the rules of natural justice. Although generally seen as a benefit, parties should be aware that deliberating over the evidential procedures can turn this into a disadvantage due to the increased time and costs. |
| Confidentiality |
Arbitration is typically private and confidential in nature. For many commercial parties, it is important to their business to keep knowledge of disputes out of the public domain, thereby limiting any reputational impact or risk of attempted hijacking of deals or clients by a rival. By contrast, litigation is usually public with court trials and judgments open to members of the public to attend or obtain. If confidentiality is a particular concern for the parties, they should specify arbitration in the contract and consider including an express confidentiality provision in the arbitration agreement. The governing law of the contract can also impact confidentiality. Under English law, there is an implied duty of confidentiality preventing most arbitration documents from being disclosed to third parties, including the statements of case and award. See our previous insights for more information on choosing English Law for cross-border transactions in East Africa. |
| Finality |
Arbitration provides only limited options for challenging the award. Decisions by the tribunal on the merits of the dispute are usually not subject to appeal. On the other hand, court judgments are frequently appealed. This means the overall process is often longer and more drawn out. However, it is debatable whether this is a disadvantage if it means the correct outcome is ultimately achieved. |
| Neutrality |
International arbitration allows parties to refer disputes to a neutral forum through their choice of seat. In a cross-border situation where the parties originate from different jurisdictions, this is important as it ensures that no party can gain the (actual or perceived) upper hand by referring the dispute to its national courts where it may already be familiar with the inner workings of the judiciary and which types of arguments will be found most persuasive. Further, for transactions in emerging markets where a government or government entity is a significant stakeholder, investors may be concerned that the local courts in those countries cannot offer true impartiality in resolving disputes. |
Practical considerations for a dispute resolution clause
For parties that are considering specifying international arbitration as the method of dispute resolution under the contract, there are a number of practical considerations to be aware of:
Choice of seat
The seat is the legal place of the arbitration. It determines the arbitration legislation that will apply, and the national courts that will supervise the arbitration. It is separate from and will not necessarily correspond to the governing law of the contract (which is applied to identify and interpret the parties’ rights and obligations).
The choice of seat is key when it comes to arbitration. In deciding whether to pick one country over another, parties should assess how neutral and impartial the local legal system is, as well as its record for enforcing arbitration agreements and awards.
Consideration of the national arbitration laws is also important as there may be mandatory and non-mandatory provisions that will apply to the arbitration, affecting fundamental matters such as the rules of evidence and the confidentiality of proceedings. Mandatory provisions will apply regardless of the contents of the parties’ arbitration agreement, but are usually limited in scope so as not to restrict party autonomy. Non-mandatory provisions will apply only where there is no clause in the arbitration agreement stating the contrary.
For cross-border transactions in emerging markets, arbitration in some local jurisdictions can still be a serious option given the legislative and judicial support for arbitration in the local laws. In other jurisdictions where the legislation and judiciary are relatively untested, arbitration in an established foreign seat is likely to be a safer choice. If this is the case, the parties should also investigate any local law requirements which prohibit a foreign seat for certain types of disputes.
In practice, the chosen seat is often an independent neutral third state, representing a compromise between the two contracting parties.
Cost
Historically, arbitration has been perceived as a cheaper alternative to litigation. However, this is not always the case as parties must pay the tribunal’s fees and any disbursements, including travel expenses. There are also significant administrative costs, such as the arbitral institution's fees and travelling and accommodation costs of the parties, the legal teams, and any witnesses or experts.
Given the flexibility of arbitral proceedings, the parties and the tribunal can minimise these costs by devising a procedure to reduce unnecessary expenses and by reviewing costs at every stage. It is therefore important that parties that choose arbitration adopt an attitude of minimising costs to avoid being hit with an excessive bill.
Multi-party disputes
A party’s right to arbitrate stems from the arbitration agreement in the contract. In a situation where there are multiple parties to a dispute, it is usually possible to add a third party to an arbitration, but it will require the consent of that party. The third party can simply refuse to agree to the joinder for tactical reasons, regardless of whether it would represent costs savings overall.
As such, arbitration is often not the best procedure for multi-party disputes, proving unmanageable and risking inconsistent findings that can prejudice a potential settlement.
Conclusion
Overall, international arbitration has become an increasingly popular method of dispute resolution in cross border M&A for the reasons above. This trend is expected to continue, with litigation in many local courts unable to offer similar guarantees of enforceability and finality. For businesses exploring more untested markets, arbitration can offer a reliability and certainty to proceedings in the event disputes arise, making investment in these jurisdictions more appealing.
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