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The award covered in this post is a good example of how arbitral tribunals deal with claims for the breach of a financial statements warranty – a very important warranty claim in practice. While cases often turn on the specific wording of the financial statements warranty, the award at hand is very relevant because it contains a discussion of a fraud claim which is often brought together with a claim for a breach of the financial statements warranty, and because it discusses the requirement of “knowledge” when inappropriate accounting practices are alleged.

Another interesting aspect of this award is that the award issued by the tribunal was a “final non-binding award”. Non-binding arbitration could be an interesting alternative method of dispute resolution in certain circumstances. For example when parties want to use the non-binding award as a springboard for further settlement discussion, and for this reason save costs and time and not be bound by process and procedure.

Since the award was heavily redacted, details such as the names of the parties, the seat of arbitration and the value of the transaction are not available. The award was published on Jus Mundi.[1]

Factual background:

By way of a Share Purchase Agreement dated October 29, 2018 (SPA), Claimant acquired from Respondents a group of companies providing communications equipment.

After the acquisition closed, Claimant noticed certain discrepancies and initiated arbitration against Respondents. Respondents had made various warranties and representations in the SPA, and had also agreed to indemnify Claimant for certain aged accounts receivable and obsolete inventory. Claimant alleged that Respondent had engaged in improper financial reporting in respect of one of the acquired group companies and fraudulently inflated its revenues.

While the redacted award does not mention the applicable law, the tribunal has relied on Delaware law while deciding the claims. Arguably, the applicable law under the SPA was Delaware law.

Claimant’s claims in the arbitration:

The claims raised by the Claimant in the arbitration can broadly be divided into three categories, viz; (i) indemnity for aged receivables, credit notes and obsolete inventory, (ii) damages for alleged improprieties in account practices of one of the group companies acquired by the Claimant, and (iii) interest on all claims.

The tribunal’s analysis of Claimant’s claim for damages for alleged accounting improprieties contains crucial insights, and hence is the focus of this post. Claimant alleged that an affiliate of the target company booked revenue before completion of a sale (so-called “sales channel stuffing”). Claimant also alleged that an affiliate of the target company improperly failed to book certain expenses for a 4-year period. In this regard, Claimant presented two alternative claims for its damages claim of USD 11,167,680  – (i) a claim for fraud which, if proved, would remove the limitation of liability under the SPA; (ii) in the alternative, a claim for breach of the financial statements warranty under the SPA.

Claimant arrived at its figure of USD 11,167,680 by multiplying USD 1,378,726, the alleged overstatement of the concerned group company’s EBITDA by 8.1, the multiplier allegedly used by Claimant in calculating the appropriate purchase price. Claimant also claimed interest on each of its foregoing claims.

Tribunal’s analysis and decision:

While the Tribunal allowed Claimant’s indemnity claim, the Tribunal rejected Claimant’s claim for damages for improper accounting. The reason was that Claimant could not sufficiently prove that the relevant persons on the Seller’s side had knowledge of the improper accounting.

First, the tribunal analyzed the fraud claim based on recklessness. The tribunal accepted that under Delaware law a buyer in a commercial transaction can base a claim for fraud on recklessness, even if the parties’ agreement did not expressly provide for it. Claimant alleged that Respondents were reckless in furnishing representations and warranties regarding the financial statements and the auditing practices and procedures of the one of the acquired group companies.

However, the tribunal held that the evidence presented by the Claimant was not sufficient to prove recklessness on the part of Respondents and establish fraud against Respondents. Hence the Claimant’s fraud claim was dismissed.

Second, the tribunal analyzed the claim for breach of the financial statements warranty (Section 3.4(a) of the SPA). A breach of the financial statements warranty required that two named persons in the Respondents’ team (“Knowledge Bearers“) had “actual knowledge after reasonable inquiry” of the accounting or auditing issues listed in Section 3.4(b) of the SPA. Respondents presented affidavits from the Knowledge Bearers that they had no knowledge of any question regarding the concerned group company’s accounting practices relating to the reporting of working capital income.

The Claimant was able to prove that the Knowledge Bearers had knowledge of a failure to book expenses for a 4 year period in an affiliate of the target company. The issue was raised in an email chain to which one of the Knowledge Bearers were copied three days before the signing. The International Controller employed by the respective affiliate company raised a concern that expenses were booked inappropriately in the Mexican affiliate. One of the Knowledge Bearers replied to the email chain that it would offer to the affiliate “any additional support needed” and that he would speak to the accounting firm in Mexico.

The Claimant was, however, unable to prove that the Knowledge Bearers had knowledge of the so-called “sales channel stuffing”, i.e. that revenues were booked even before a sale was completed. The tribunal held:

“[…]there is insufficient evidence presented that, even if reasonable inquiry had been undertaken, either [Person 1] or [Person 2] would have had Knowledge before the closing date that the booking of revenues had been done before a sale was completed.

The investigation at the affiliate in Mexico that brought to light the inappropriate accounting practice was initiated only after  the closing date.

Even though Claimant was partly successful in proving that Respondents’ were liable for a breach of the financial statements warranty, Claimant’s claim was dismissed in full. This is because Claimant failed to present sufficient evidence on the quantum of the damages. As noted by the tribunal:

Claimant does not separate its warranty breach claim into separate financial components for the “expense booking errors” and the “sales channel stuffing”; therefore, the Tribunal has insufficient

evidence to award financial damages for the warranty breach premised upon the former

accounting impropriety.


Baker McKenzie has undertaken a study of more than 120 Post-M&A awards. The study resulted in various findings – two of which are in line with the award at hand. Firstly, indemnity claims have a very high success rate. This is confirmed by the award at hand which awarded the indemnity claims in full. Secondly, the most common warranty claim raised by purchasers is a financial statements warranty claim – as in the case at hand. The reason why the financial statements warranty has such a high relevance in practice is because the financial statements of the target company are usually the basis on which the purchaser calculates the purchase price. Disputes concerning the financial statements warranty typically concern questions that also played a role here: the knowledge of the seller and the quantification. It is to be noted that the purchaser in the case at hand calculated its damages on the basis of an EBITDA multiple. For the analysis of an arbitral award that has recently confirmed this calculation of damages under the law of California, click here.



Dr. Markus Altenkirch LL.M. is a member of Baker McKenzie's Dispute Resolution teams in Düsseldorf and London . Markus focuses on international arbitration and currently represents clients in ICC, DIS, LCIA, and HKIAC arbitrations. Markus primarily advises on Post-M&A as well as construction disputes. Moreover, Markus regularly advises on disputes in the Pharmaceutical industry. In 2021, Markus has started his own podcast series: #zukunft. Markus, and his colleague Lisa Reiser, interview leading arbitration practitioners and in-house lawyers on the future of international arbitration. Markus teaches at the University of Mainz and regularly publishes in the field of international arbitration. He is a contributor and editor for Global Arbitration News. Markus Altenkirch can be reached at and +49 211 311160 and +44 20 7919 1000.


Brigitta John is a member of the Dispute Resolution team at Baker McKenzie in Frankfurt. Ms. John holds an LL.M. in International Dispute Settlement from the University of Geneva and the Graduate Institute of International and Development Studies. She has more than 13 years of post qualification experience in international arbitration as well as civil and commercial litigation. She can be reached at