“Justice may be delayed, but it is never denied.” This saying perfectly encapsulates the essence of a recent landmark decision by the Highest Regional Court of Bavaria (BayObLG) dated 12 December 2023 (Case No. 102 SchH 114/23 e). The court tackled the intricate relationship and interplay between arbitration clauses and expert determination clauses. It determined that expert determination clauses do not render arbitration proceedings inadmissible but “only” unfounded at present (“zurzeit unbegründet“) until the expert determination is concluded.
Factual Background
The case concerned a dispute between a German company and a former shareholder regarding the amount of compensation owed following the shareholder’s exit from the company. The articles of association contained both a general arbitration clause for all disputes arising between shareholders or between the company and its shareholders as well as a specific expert determination clause for disputes over the amount of the compensation owed. The shareholder had already received a certain amount as compensation but informed the company of his intention to commence arbitration proceedings claiming a higher compensation.
Consequently, the company sought a court order to declare any arbitration proceedings inadmissible, arguing that the expert determination clause overrides the general arbitration clause when it comes to determining the amount of the compensation owed.
Court’s Findings
The Highest Regional Court of Bavaria held that the existence of an expert determination clause does not inherently preclude the jurisdiction of an arbitral tribunal. Instead, the expert determination clause only rendered the arbitration claim “currently unfounded” until the expert determination is completed.
Key points of the decision are:
1. Interpretation of conflicting clauses on a case-by-case basis
The court emphasized that the relationship between several dispute resolution clauses depends on the specific circumstances of the case: although corporate law provisions in the articles of association of a company must be interpreted objectively and not according to the subjective understanding of the shareholders, the wording, meaning and purpose of the dispute resolution clauses as well as their systematic references are also decisive when determining their relationship and interdependencies. In the case at hand, the court carefully interpreted the expert determination clause, concluding that it did not grant the expert any judicial capacity to make enforceable decisions. Therefore, the clause did not override the general arbitration clause.
2. Goal of expert determination generally different from arbitration:
The court confirmed that arbitral tribunals retain jurisdiction over disputes even when an expert determination clause exists. The expert determination clause may delay the proceedings but does not eliminate the tribunal’s authority. Typically, an expert is retained by the parties to determine specific valuation issues in order to prevent an escalation of the dispute. But the expert’s task generally is not to create an enforceable decision or order. Therefore, it is generally not in the parties’ interest to waive the judicial review of the expert’s assessment for legal inaccuracies under the applicable law, especially given the significant economic impact of such valuation assessments in M&A transactions.
3. Procedural implications of staggered dispute resolution clauses
An expert determination clause implies that no legal action shall be pursued until the expert has rendered his opinion. If an action is nevertheless brought before an arbitral tribunal, it is to be regarded as “currently unfounded”. The arbitral tribunal must then halt the proceedings until the expert’s option has been rendered.
Conclusion
This decision of the Highest Regional Court of Bavaria provides clarity on the interaction between arbitration and expert determination clauses. This is particularly valuable for post-M&A disputes where it is quite common that a contractual purchase price adjustment clause or earn-out clause refers disputes over valuation issues to a neutral expert. The court clarified that a parallel contractual arbitration clause remains intact. This highlights once again the arbitration-friendly approach of German courts.
The decision does however not solve the “ping pong” problem in case of expert determination alongside arbitration clauses. If certain terms in the valuation clause need to be legally interpreted, the opposing party may argue that such clause needs to be clarified as preliminary legal question by the arbitral tribunal before it can be referred to the neutral expert. If, on the other hand, an action is brought before the arbitral tribunal directly, the opposing party may argue that the valuation issues must be decided by the neutral expert first. The claimant can never do it right. This is particularly unfortunate because the tandem of expert determination and arbitration was meant to ensure a swift and efficient dispute resolution rather than building up obstacles and procedural battles.
