Amy C Kläsener - The Guide to M_A Arbitration

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underlying economic implications, as well as an open view on particular mechanisms or sets of rules included in the contract, which do not always follow the general concepts of Polish law. Moreover, considering that M&A transactions are increasingly cross-border, the possibility of agreeing on the language governing the arbitration is yet another useful aspect considered by the parties.As regards international disputes, recognition and enforcement of arbitral awards under the NewYork Convention on the Recognition and Enforcement of Foreign Arbitral Awards is a strong reason for choosing arbitration over litigation.

When comparing the speed of resolving M&A-related disputes in Poland, arbitration has proven to be more advantageous than litigation. However, what needs to be considered is the fact that arbitral awards are very often being challenged before the state courts. Lengthy follow-up proceedings and the risk of the award being set aside effectively reduce the benefits of potentially faster arbitration.

The costs of arbitration remain higher than the costs of litigation proceedings. However, the competitiveness of litigation in this respect has been effectively reduced by recent legislative changes. Nevertheless, the fact that it is possible for the prevailing party to recover most of its lawyer’s fees is what still makes arbitration attractive in what can be costly litigation.

Grounds for M&A arbitrations

There is no official publicly available information on the relative frequency of any types of M&A arbitrations in Poland.

A wide variety of grounds may be identified based on market experience, including failure to complete the transaction, price adjustment, earn-out, pre-contractual failure to disclose or fraud, breach of representations and warranties.As the general number of M&A arbitrations is relatively low (see ‘Frequency of M&A disputes’, above), it is in fact not possible to establish the degree of frequency of any particular types of claims.

Fraud and failure to disclose

Fraud or error by the parties are the two main textbook reasons that would allow a party to rescind a contract. Error by a party needs to pertain to the main obligations under the contract (e.g., error as to the number of shares being the subject of the deal), whereas in the case of fraud, it is irrelevant whether the fraud pertained directly to the essential business of the contract or not.

Still, the scope of duties to disclose information in M&A transactions goes beyond the circumstances that potentially fall under the general civil law regulations of fraud or error. However, it remains unclear to what extent and how far-reaching it is, and therefore it is often the subject of a contractual arrangement between the parties.

It remains a general rule that the seller needs to provide accurate information and cannot conceal issues if actively requested. Because in the majority of M&A transactions a due diligence process is carried out, the seller may reasonably expect that the buyer identifies certain risks or defects (if acting with due care) and to that extent the seller is released from actively informing the buyer about it.

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Burden of proof

The general rule on burden of proof in Polish law is stipulated in Article 6 of the Polish Civil Code (substantive law).The Article provides that the burden of proof relating to a fact shall rest on the person who attributes legal effects to that fact.This rule is well established in Polish arbitration and is also applicable to M&A transaction claims.

There are various detailed provisions, however, that may disable or shift the burden of proof between the parties.Those provisions can be divided into two categories:

legal presumptions – provisions that set forward certain facts ex lege. However, legal presumptions can still be rebutted. If that is the case, the party that declares otherwise is obliged to provide evidence to the contrary; and

provisions that shift the burden of proof to the other party. A textbook example would be Article 471 of the Polish Civil Code, which provides that the debtor is obliged to repair any damage resulting from non-performance or improper performance of the obligation, unless the non-performance or improper performance is a consequence of circumstances for which the debtor is not liable. If that is the case, the debtor may exclude its liability by providing appropriate evidence.

The above rules are well established in Poland and are generally used in arbitration too. However, it should be emphasised that arbitral tribunals have a certain amount of freedom in establishing the duties of the parties in this regard, since they are subject to restrictions that result from the relevant legislation (i.e., the Polish Code of Civil Procedure), the arbitration rules of the relevant arbitral institution (as agreed by the parties) and the arbitration clause in the relevant contract.

An arbitration clause may contain or refer to a particular kind of procedural agreement between the parties, which would set forth in detail the rules on the burden of proof in the relevant proceedings. However, a procedural agreement on burden of proof in an arbitration clause needs to reflect the rule of equal treatment of the parties, as an award rendered on the basis of such a clause may be at risk of being set aside.

Knowledge sharing

A common market practice is to include knowledge qualifiers in M&A contracts to limit the liability of the parties to the transaction for statements made in deal documentation, such as warranties, share or asset purchase agreements or operational representations.

In respect of contract negotiations, it is questionable whether the definition of ‘best knowledge’ refers to the seller’s knowledge only or includes the target company’s knowledge as well (accordingly, in the case of a target holding company with operational subsidiaries, knowledge of the subsidiaries’ corporate officers or other key personnel).Another element that usually features in contract negotiations is determining whether best knowledge constitutes simply a person’s actual knowledge or includes what the person should have known about the matter in question when acting diligently.

The main implication from an arbitration standpoint seems obvious: the greater the number of people whose knowledge triggers liability, the higher the chances of proving a violation of contractual representations and warranties. In addition, if it is construed that the knowledge a person should have had was to count towards contractual liability, it

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would make the position of a party in the arbitration better, for, in addition to such persons’ witness statements, experts could also give opinions on what the relevant persons should typically have known.

However, it is possible to point to further, and consequently less obvious, effects of a contractual definition of ‘best knowledge’. Once certain operational representations and warranties (back-to-back) have been confirmed to the sellers by the target company’s management, or other key persons, prior to the contract being signed, then it may be more difficult for a buyer to claim that these persons (those working in the buyer’s field) either knew or should have known that the pertinent representations or warranties were not correct.This can get complicated as any such persons, post-closing, who occupy (usually) key positions, would be personally implicated by their new shareholder’s remedial endeavours because of their personal liability towards the sellers.What also needs to be considered is the fact that knowledge within a target company can be subject to special confidentiality restrictions and, because of that, is not so readily accessible or usable by sellers or buyers in an M&A transaction.This can prove to be the case especially for entities under supervision, such as banks or other financial institutions that are subject to obligatory banking secrecy, and entities that are subject to stringent contractual confidentiality obligations or strict business and trade secrets.

Remedies

The Polish Civil Code provides for several potential remedies that can be applied by parties to any asset or share purchase agreement. Those used most often are damages (including limited damages for culpa in contrahendo), liability for breach of representation and warranties, and withdrawal from a contract, among others.

In practice, as regards remedies in M&A transactions, the parties very seldom rely on their potential statutory rights and obligations and attempt to provide their own set of rules in the contract itself, so as to give them a more tailor-made solution in the event of breach of contract.This holds true, in particular, if a potential dispute is to be decided upon by an arbitral tribunal, which will be more willing to set aside the statutory set of rules and apply only the rules agreed by the parties.The seller tries very often to limit its liability for damages to the actual damage only, that is to say any lost profit is excluded. It is also common that the liability is capped at a certain amount; this is often the purchase price.

Other popular means of providing remedies to parties in M&A transactions are the price adjustment mechanism, compensation in the case of a leak of a locked-box mechanism, or regulations in the case of breach of warranty or representation. The latter is, in most cases, regulated by a mechanism that should hold either the buyer or the target guiltless; in other words, put the buyer or the target in a position they would be in if the respective warranty or representation were accurate. Potential unwinding scenarios (in practice rather unlikely) are often handled by put or call options.

Measure of damages

There are no specific rules concerning award of damages in arbitration other than the general rules of Polish law or specific regulations provided by the parties to an M&A transaction. Polish law does not provide for any particular method for calculating damages and therefore it is very common that the parties to an asset or share deal regulate extensively

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both the scope of liability (in particular by including specific definitions of ‘loss’ or ‘damage’) as well as the mechanism for calculating damages or other pecuniary obligations (e.g., price adjustment).

The general rule under Polish law is that a party must be compensated for damage it suffered as a result of breach of contract by another party. As a rule, compensation includes both the actual loss a party suffered because of the breach and lost profit. Depending on the nature of the deal, exclusion of liability for lost profit is frequently subject to intense negotiations between the parties. Still, if it is possible to claim lost profit, the general rules of Polish law require that it is proven with a very high degree of certainty that the amount of profit claimed would have been achieved. In practice, arbitral tribunals take a more flexible view than common courts on the degree of certainty that needs to be proven by the claimant in this respect.

Special substantive issues

Polish substantive law provides for direct liability for intentional misinformation, commonly referred to as culpa in contrahendo. In essence, it stipulates that any party that started or continued negotiations in contravention of good practice, particularly without any intention of concluding a contract, shall be obliged to compensate for the damage that the other party suffered as a result of relying on conclusion of the contract.

The common remedy for intentional culpa in contrahendo is the payment of reliance damages.The seller would have to restore the buyer to the position the buyer would have been in if the buyer had not relied on the misinformation.

Special procedural issues

There are a few aspects of procedural law that are regulated in the Polish Code of Civil Procedure that can be relevant in M&A arbitration; in particular, (1) that it is only possible to agree on an arbitration clause with a consumer after a dispute has arisen, (2) the granting of an interim relief by a common court, and (3) common court assistance in taking evidence.

Arbitration agreement with a consumer

According to the provisions of the Polish Code of Civil Procedure, an arbitration agreement with a consumer may only be agreed in writing and only after the dispute has arisen.2 Moreover, the consumer needs to be informed in the arbitration clause itself – on pain of invalidity - that the verdict of the arbitral tribunal will be binding on the consumer in the same way as a judgment of a common court.

In practice, this regulation more commonly affects minor M&A deals, in particular those concerning start-ups, in which the business is acquired from its founders or other individuals who do not carry out any business activities. In such cases, it is only possible for the parties to agree to jurisdiction of the common courts.

2 Polish Code of Civil Procedure, Article 1164.

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Interim relief

Submitting a dispute to arbitration does not exclude the possibility for the claimant to apply for interim relief to a common court in Poland.3 Interim relief can be obtained either before arbitration proceedings or while they are pending. In the former case, the claimant is obliged to file a request for arbitration or a statement of claim no later than two weeks after the issuance of the decision on interim relief, otherwise the interim relief is automatically cancelled. Obtaining interim relief from a common court is also possible in situations where the seat of arbitration is outside Poland or not specified.

Taking evidence by a common court

The Polish Code of Civil Procedure also provides for the possibility of legal assistance from common courts to conduct evidence proceedings that an arbitral tribunal is not able to pursue.4 In practice, this seldom applies in M&A arbitration, as usually both parties make sure they provide sufficient evidence to win the case.

Expert determinations

Unlike in other jurisdictions, neither Polish law nor any of the regulations of the major arbitration courts5 in Poland provide for any special regimes for expert determinations. If available, such expert determinations would usually be treated as a substantiated position of the party, unless the parties made provision in the arbitration clause for any other specific treatment of such a decision.

Equal treatment of the parties

Even though this rule seems particularly relevant in arbitration, it can affect the validity of an arbitration clause. It is well established in Polish case law that an arbitration clause might be invalid if the true effect of the clause restricts a party from access to justice.This is most likely to be the case in M&A transactions involving parties with different financial standing, when an agreement to jurisdiction by a specific arbitration court may be regarded as invalid in the event that the ‘weaker’ party cannot afford the arbitration fees and charges.

3ibid., at Article 1166.

4ibid., at Article 1192.

5See https://sakig.pl/en/regulations-and-tariff/arbitration/rules and https://www.sadarbitrazowy.org.pl/ Content/Uploaded/files/Przepisy/regulamin2017-EN-99x210-nowy.pdf.

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Singapore

Philip Jeyaretnam SC and Lau Wen Jin1

Frequency of M&A disputes

M&A disputes, especially M&A disputes with a foreign element, have been increasing and are expected to increase in the coming years, fuelled by increased M&A activity in Singapore and the region.2 Singapore recorded 688 M&A deals valued at a total of $99 billion in 2018, compared with 698 deals valued at $75.4 billion in 2017 and 684 deals valued at $82.7 billion in 2016.

In 2018, there were 458 cross-border M&A deals in Singapore registering a total of $89.1 billion (an increase from $65.9 billion in 2017), and the bulk of total deal value came from 315 outbound transactions worth $81.1 billion, contributing to over 82 per cent of the total value in 2018 for M&A deals (cross-border M&A deals contributed to over 72 per cent of the total value of M&A deals in 2017).3 Domestic transactions contributed to only 10 per cent of total M&A deal value with 230 deals worth $9.9 billion.4 The increasingly large proportion of cross-border M&A deals is expected to increase the risk of disputes, perhaps because of differing cultures, expectations and practices. Indeed, there has been a steady increase in corporate disputes (which include M&A disputes) handled by the Singapore International Arbitration Centre (SIAC) from about 46 to 54 to 64 to 61 for the years 2015, 2016, 2017 and 2018, respectively.5

1Philip Jeyaretnam SC is a senior partner and Lau Wen Jin is a senior associate at Dentons Rodyk & Davidson LLP.

2Srividya Gopalakrishnan & Ashish McLaren,Transaction Trail Annual Issue 2018, accessible: https://www.duffandphelps.com/insights/publications/valuation/duff-and-phelps-launches- transaction-trail-2018-report (last accessed 4 September 2019).

3ibid.

4ibid.

5Annual reports of the Singapore International Arbitration Centre, 2015, 2016, 2017 and 2018.

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Form of dispute resolution

The increase in cross-border M&A deals means that many of the disputes are likely to find their way into arbitration instead of litigation because arbitration is often perceived to be a neutral mode of dispute resolution among parties of different nationalities. Arbitration also has the advantage of privacy and confidentiality, as well as relative ease of enforcement around the world, by virtue of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Hence, M&A agreements executed in Asia with a cross-border element frequently specify arbitration as the designated mode of dispute resolution, with Singapore being the most frequently chosen seat.

The establishment of the Singapore International Commercial Court (SICC) in 2015 now offers contracting parties an additional option.The advantages of the SICC over arbitration are its high-quality commercial bench comprising eminent judges from other jurisdictions and Singapore’s own strong local bench.

Expert determinations are often adopted when the dispute is one of price adjustment under express contractual provisions.

Grounds for M&A arbitrations

Fraud and failure to disclose

Tort of deceit

A person who claims to have suffered loss from a fraudulent representation can seek to claim under contract law or in the tort of deceit.

The elements to be established in a claim under the tort of deceit are as follows:

•there must be a representation of fact made by words or conduct;

•the representation must be made with the intention that it should be acted on by the

claimant, or by a class of persons that includes the claimant;

•it must be proved that the claimant had acted on the false statement;

•it must be proved that the claimant suffered damage by so doing; and

•the representation must be made with knowledge that it is false; it must be wilfully false, or at least made in the absence of any genuine belief that it is true.6

The claimant must prove actual fraud.7 The allegation of fraud is a serious one, and the standard of proof is that based on a balance of probabilities; but the more serious the allegation, the more the party on whose shoulders the burden of proof falls may have to do to

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establish his case.8 This fraud is proved only when it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly, without caring whether it be true or false.9 Dishonesty is the touchstone that distinguishes fraudulent misrepresentation from other forms of misrepresentation.10 It is the representor’s own (subjective) belief that is crucial.This must be ascertained by the court based on the objective evidence available, but the court cannot substitute its own view as to what it thinks the representor’s belief was.11 Even if a reasonable person would think that the belief the representor claimed to have had at the time he or she made the statement was unreasonable, that would not render that particular statement fraudulent if the representor honestly believed in what he or she was representing.12 The concept of recklessness means indifference to or wilful disregard of the truth.13

Negligent misrepresentation

There are two different causes of action available for negligent misrepresentation: (1) liability in the tort of negligence for negligent misstatement, and (2) liability pursuant to Section 2(1) of the Misrepresentation Act.14 Liability for negligent misstatement in the tort of negligence requires the claimant to establish a duty of care owed by the representor to the representee that has been breached. On the other hand, liability under the Misrepresentation Act does not require the duty of care to be owed (but it does require a contractual relationship between the representor and the representee). Representees only need establish the elements of actionable misrepresentation, and the representors would be liable unless they can prove their honesty and that they were reasonable in their belief of the truth of the representation.

Innocent misrepresentation

An innocent misrepresentation would be actionable misrepresentation that has been proven but is not fraudulent or negligent.The following must be proven:15

•the representor made a false representation of fact; and

•the representation induced actual reliance on the part of the representor.

8TangYoke Kheng v. Lek Benedict [2005] 3 SLR(R) 263 at [14]; Alwie Handoyo v.Tjong Very Sumito and another and another appeal [2013] 4 SLR 308 at [159] to [161].

9Panatron Pte Ltd and another v. Lee Cheow Lee and another [2001] 2 SLR(R) 435, at [13].

10Raiffeisen Zentralbank Osterreich AG v.Archer Daniels Midland Co and others [2007] 1 SLR(R) 196 at [40].

11Wee Chiaw Sek Anna v. Ng Li-Ann Genevieve (sole executrix of the estate of Ng Hock Seng, deceased) and another

[2013] 3 SLR 801 at [37].

12ibid.

13ibid., at [34].

14Cap 390, 1994 Rev Ed.

15Andrew Phang Boon Leong (ed.),The Law of Contract in Singapore (Academy Publishing, 2012), at paras. 11.006 to 11.096.

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Burden of proof

Sections 103 and 105 of the Evidence Act16 place the burden of proving a fact on the party that asserts the existence of any fact in issue or relevant fact respectively.17 However, the Evidence Act, which applies to all judicial proceedings in any court in Singapore, expressly states that it does not apply to arbitration proceedings.18 Accordingly, the arbitral tribunal is not bound by the rules of evidence that apply in the courts of Singapore. Indeed, the parties are free to agree on the procedure to be followed by the arbitral tribunal.19 Failing such agreement, the tribunal may conduct the arbitration as it considers appropriate; and the power conferred on it includes the power to determine the admissibility, relevance, materiality and weight of any evidence.20 Nevertheless, it is commonly accepted that parties shall have the burden of proving the facts relied on to support their claim or defence,21 and the standard of proof is that of ‘balance of probability’.22

Section 2(1) of the Misrepresentation Act provides the claimant a significant advantage in terms of burden of proof in an action for misrepresentation under common law. This is because a claimant representee need only show that the representor made a false representation that induced the representee to enter into the contract, and the burden of proof then shifts to the representor to show that he or she had reasonable grounds to believe, and did believe up to the time the contract was made, that the facts represented were true.23 In contrast, the burden on a claimant suing for negligent misstatement in tort is significantly heavier as the claimant must establish a duty of care owed by the representor to the representee and that the representor breached this duty of care.

Unlike Section 2(1) of the Misrepresentation Act, it is not a defence in an action for innocent misrepresentation for the representor to claim a belief in a representation that was objectively false.24

Remedies

In domestic arbitration, the parties may agree on the arbitral tribunal’s powers as regards remedies,25 and unless otherwise agreed by the parties, the tribunal may award any remedy or relief that could have been ordered by the Singapore High Court if the dispute had been the subject of civil proceedings in that court.26 In international arbitration, subject to the law applicable to the dispute, the tribunal may grant similarly broad relief.27

16Cap 97, 1997 Rev Ed.

17Cooperatieve Centrale Raiffeisen-Boerenleenbank BA (trading as Rabobank International), Singapore Branch v. Motorola Electronics Pte Ltd [2011] 2 SLR 63 at [30].

18Evidence Act (Cap 97, 1997 Rev Ed), s. 2(1).

19Arbitration Act (Cap 10, 2002 Rev Ed), s. 23(1);Art 19(1) Model Law.

20Arbitration Act (Cap 10, 2002 Rev Ed), s. 23(2);Art 19(2) Model Law.

21See UNCITRAL Arbitration Rules,Art 27(1).

22Sundaresh Menon (ed.), Arbitration in Singapore:A Practical Guide (Sweet & Maxwell, 2nd Ed., 2018) at para. 11.038.

23Lim Koon Park and another v.Yap Jin Meng Bryan and another [2013] 4 SLR 150 at [38]–[39].

24 Forum Development Pte Ltd v. Global Accent Trading Pte Ltd and another appeal [1994] 3 SLR(R) 1097 at [19].

25Arbitration Act (Cap 10, 2002 Rev Ed), s. 34(1).

26ibid., s. 34(2).

27International Arbitration Act (Cap 143A, 2002 Rev Ed), s. 12(5).

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The Supreme Court of Judicature Act28 provides that the Singapore High Court has the power to ‘grant all reliefs and remedies at law and in equity, including damages in addition to, or in substitution for, an injunction or specific performance’.

In the case of actionable misrepresentation under contract law, the representee may rescind or affirm the contract.The right to rescind a contract entitles representees to have the contract set aside and be restored to their original position.This entails the avoidance of the transaction ab initio, and the restoration of the parties to the position occupied prior to the entry into the contract.The effect is the cancellation of all future obligations, and the retrospective restoration of any benefits that may already have been transferred at the date of the rescission.29 Until the moment of rescission (at the option of the representee), the contract is effective to create rights and obligations, and to transfer property.30 In the case of non-fraudulent (i.e., innocent and negligent) misrepresentation, the court may award damages in lieu of rescission under Section 2(2) of the Misrepresentation Act if the court is of the opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused if the contract were upheld, as well as to the loss that rescission would cause to the other party.

Damages are available as of right for negligent and fraudulent misrepresentation, and breach of contract.

Measure of damages

The object of damages for breach of contract is to put the victim, so far as money can do it, in the same situation as if the contract had been performed. In other words, victims are entitled to be compensated for the loss of their bargain, so that their expectations arising out of or created by the contract are protected.31

On the other hand, the object of damages in tort (as in fraudulent and negligent misrepresentation) is to put victims into the position in which they would have been, had the tort not been committed.Tortious misrepresentation does, indeed, create new expectations, but the purpose of damages even for that tort is to put victims into the position they would have been in if the misrepresentation had not been made, rather than if the representation had been true.Victims may even be compensated for loss of profit if the tort impairs expectations which exist independently of it.32

The general principle is that damages for fraudulent misrepresentation would include all loss that flowed directly as a result of the entry by the plaintiff (in reliance on the fraudulent misrepresentation) into the transaction, regardless of whether the loss was foreseeable, and would include all consequential loss.33 The approach to awarding damages for the tort of deceit is broader than the tort measure applicable to that for negligent misrepresentation. In particular, damages awarded with respect to a negligent misrepresentation

28Cap 322, 2007 Rev Ed, Schedule 1, para. 14.

29Andrew Phang Boon Leong (ed.),The Law of Contract in Singapore (Academy Publishing, 2012), at para. 11.098.

30ibid., at para. 11.100.

31Wishing Star Ltd v. Jurong Town Corp [2008] 2 SLR(R) 909 at [28].

32ibid., at [28].

33ibid., at [21].

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