The analysis of the possibilities, limitations, pros and cons of using arbitration and other alternative dispute resolution methods (DRMs) in an M&A context is not an entirely new subject.

Nonetheless, it seems that it is not unusual for parties involved in an M&A deal to approach DRMs as an aspect of minor relevance in their agreements, often relegating this very important issue to a final – and sometimes hurried – phase of negotiations. It is for this reason that arbitration clauses, very often used in agreements related to M&A transactions, are sometimes referred to as ‘midnight clauses’.

This happens for three main reasons: (i) parties often understand that some clauses of their agreement (e.g., clauses about price, allocation of liabilities, etc.) are more important than others, leaving the discussion regarding the less relevant clauses to the very end of the negotiation; (ii) parties naturally (and sometimes naively) tend to believe, during the negotiation phase of the deal, that the chances of a dispute between them ever existing is very low; and (iii) it is sometimes difficult for parties to actually envisage and realise the practical advantages and benefits of a well-crafted DRM, especially in comparison with classic litigation before state courts.

Parties should be aware that treating DRMs as a secondary or less important aspect of their contracts could mean missing the opportunity of significantly improving the effectiveness and enforceability of the terms and obligations heavily negotiated and agreed upon by the parties reflected in their agreement. Even more serious than that, in some circumstances, a badly drafted provision can protract the enforcement of a legitimate right or the pursuit of a claim for a long period at a very high cost. For instance, a party may have a legitimate claim, but it could spend a long time litigating the form and validity of the dispute resolution method chosen before finally getting what it is entitled to.

Jul-Sep 2016 issue

Pinheiro Neto Advogados