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Arbitration proceedings versus ordinary tribunals in transactions

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Published on 14 December 2021 | Reading time approx. 3 minutes

 

Contract drafting is of crucial importance and a central element in the M&A process. In this process, the parties involved are repeatedly faced with the dilemma about which court should be referred to in the event of future disputes arising from or in connection with the acquisition of a company. Should a possible future dispute be settled by the ordinary court as provided for by law or would it be better to entrust it to the arbitration court?

Background

When drafting company acquisition agreements – regardless of whether the transaction is a share or asset deal – in addition to the essential elements of the agreement such as service performance and consideration, an extremely important issue that should not be underestimated is the choice of the framework for settling future disputes between the contracting parties arising from or in connection with the agreement in question.


As a rule, the parties have a choice between two alternatives: In Germany, impending disputes can either be settled before ordinary courts, as provided for by law, or the parties may decide to refer the dispute to an arbitration court, in which case they can have influence on its organisation, composition and the procedure to be applied by appropriately drafting the contract.

 

Interest situation

In order to decide which the appropriate procedure is, it is necessary to take a closer look at the situation around the interests of the respective parties or the questions that typically arise. These in turn are derived from the existing decision-making criteria and their respective priority for the parties involved. These are determined in particular based on the following issues or questions:

  • Where should be the seat of the court?
  • What is the speed of the court proceedings or the standard course of proceedings in terms of time?
  • How expert are the judges in the topic of the issue at hand?
  • What is the competence of the judges or how much experience do they have?
  • What influence do the parties have on the selection of the judges appointed to decide the issue?
  • How can the claims (in respect of which a writ of execution has been issued) be enforced or recovered?
  • Should the court decision be verifiable by one or more further instances?
  • What is the degree of confidentiality of the contract content to be heard by the court? Will the public be involved in the proceedings or will they be open to the public?
  • What court fees should ultimately be expected?

 

The above list, which is not exhaustive, already shows the consequences that the choice of the court or the place of jurisdiction can have. Nevertheless, the parties involved often treat and negotiate these matters very carelessly and not with the necessary attention and meticulousness. This is already reflected in the fact that these provisions usually appear in the final provisions of a contract and are therefore often underestimated by the parties, regarded as an unnecessary burden, a mere formality or simply as necessary standard clauses in the M&A contract. Experience from M&A litigation shows that this is far from true. On the contrary, the practice of court rulings, especially in the area of company acquisition agreements, shows that these clauses and considering them in advance in detail can be of crucial importance and have far-reaching consequences. Therefore, it is not only worth addressing those issues in depth and in detail, but it is even mandatory from the perspective of a litigator.


When trying to answer the above questions, you may sometimes come to the conclusion that the later recourse to the arbitration court could have considerable advantages; this also applies in particular to the aspect of confidentiality. M&A contracts normally contain controversial information that is not intended for the general public about the parties involved, other shareholdings or know-how transferred as part of the transaction, and about trade and business secrets. The secrecy of these details and circumstances usually is of paramount importance to the parties and thus often decisive for the decision in favour of arbitration court. After all, who wants the dispute with the contracting party, no matter how delicate, to be played out in front of the public or even to be read about in the daily newspaper the next day due to the coincidental presence of a journalist?


On the other hand, the parties involved usually have justified reservations about the involvement of an arbitration court whose primary feature is that its decision is final and binding on the parties and cannot be re-examined by any further instance or even by the courts of appeal. It is also important to consider that the obtained decision can be later effectively and timely enforced in Germany or abroad. Because of this duality it is worth taking a closer look at the possibilities of preserving confidentiality of matters decided by ordinary courts in accordance with the will of the parties. Something similar is known from family law disputes, for example, although confidentiality there is provided for in the procedural law. Therefore, it is worth taking a look at the law.

 

Moulding Possibilities

Sections 172 and 173 of the Courts Constitution Act (GVG) provide for the possibility of excluding the public from a hearing or from a part thereof. The same applies to the pronouncement of the reasons for the decision or a part thereof. In this way, the confidentiality desired by the parties to a company acquisition can often be adequately preserved also before the ordinary courts. In order to ensure this, the respective M&A contract should include a corresponding arrangement, which must then be observed by the court.

 

Conclusion

If confidentiality of the contractual contents is of decisive importance for the parties involved in an M&A process when choosing the court and if they want to exclude the public from possible later court proceedings for this very reason, it is worthwhile to examine in more detail whether this objective can also be achieved by incorporating a corresponding contractual arrangement concerning the proceedings before the ordinary courts.

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