Parties to an M&A transaction usually agree to resolve disputes arising out of or in connection with the sale and purchase agreement (SPA) through arbitration. However, parties at the same time often opt to also include expert determination as the means to resolve specific disputes regarding technical or accounting matters, particularly post-closing purchase price adjustments.
Such two-pronged approach reflects the parties' intention to allocate the resolution of disputes according to expertise and effectiveness: legal and interpretative questions are reserved for the arbitral tribunal, while accounting, technical or other specialist matters are entrusted to a respective expert.
This division of competences can, however, become a source of dispute itself. The line between what constitutes an issue suitable for expert determination and what amounts to a legal or contractual interpretation falling within the exclusive competence of the arbitral tribunal is not always clear. Thus, parties might find themselves in an intricate situation: If the party requests arbitration before the expert determination is concluded, the arbitral tribunal might dismiss the claim as currently unfounded. If the party initiates expert determination proceedings in the first place, the decision of the expert might be ultimately dismissed by the arbitral tribunal if (part of) the decision of the expert falls outside the scope of the expert's competence.
There is no universal formula for resolving these conflicts. However, experience shows that the parties might consider initiating arbitration and splitting the proceedings into three phases:
In phase 1, the arbitral tribunal, e.g. via an interim declaratory award, may decide in advance on certain disputed legal questions that are relevant for the expert determination proceedings but outside the scope of the expert determination and, consequently, inside the competence of the arbitral tribunal.
In phase 2, the expert determination proceedings are conducted, taking into account the decision rendered by the arbitral tribunal.
In phase 3, the arbitral tribunal decides on (i) potential objections of the parties to the expert's decision (in particular whether the expert's decision is evidently incorrect) and (ii) any other issues outside of the scope of the expert determination proceedings.
A main challenge of this split procedure is that the parties are required to anticipate which legal issues will be relevant for the expert determination proceedings and which will be outside of the expert's competence early in the proceedings. Unforeseen issues that appear only later could be resolved by an additional interim award of the arbitral tribunal, with the expert determination proceedings being paused in the meantime. However, this may lead to some delay of the proceedings.
Therefore, parties to an M&A transaction should consider the intricacies of expert determination proceedings when drafting their dispute resolution clause in the SPA, and keep in mind that expert determination can also be incorporated in regular arbitration proceedings.
