Implementation of alternative dispute resolution mechanisms in cross border mergers: International legal study

Parg2: Merging non binding ADR with Arbitration

In this paragraph we will discuss the integration of non binding ADR into the frame work of Arbitration (A), and suggest the use of the multi step resolution process (B)

A-Integrating non Binding ADR into the Frame work of Arbitration

Arbitration is a form of binding method to resolve disputes where the parties involved presents their disagreement to one or a panel of private, independent and qualified third party called arbitrators. Arbitrators are generally lawyers or law professors and are chosen in respect to their experience and competences in specific areas of law. To use Arbitration there must be an Arbitration clause already written into contract that exits between the parties and the process of arbitration is concluded by an arbitral award that could be considered an effective legal frame for non binding ADR procedures.

First, Arbitration clause can be drafted in numerous ways: typically it will be a provision in an underlying contract, calling for Arbitration of any future dispute relating to the contract (clause compromissoire) or in an existing dispute where the parties agree to submit that dispute to Arbitration (compromis)¹⁶⁷. Arbitration clause or (clause compromissoire) is frequently used for the disputes in company law¹⁶⁸, and is considered as the preferred mean to resolve conflicts between companies and their shareholders. Practically it may intervene for the following various issues: Transfer of shares, evaluation of registered assets, dissolution of companies, distribution of dividend, liability action against the directors of the companies¹⁶⁹. As it was remarkably quoted by El Ahdab, many common law and civil law legal systems permit the validity of the recourse to Arbitration in Company Law, including Tunisia¹⁷⁰. By including contractual Arbitration clause, parties are agreeing to the resolution of their disputes though a process that consists of very simple proceedings. Arbitration proceedings are private, readily available, less formal, less subject to appellate review, and often less costly. Moreover, competent and qualified arbitrators experienced in the dealings of the business world examine the dispute. The parties choose Arbitration rules applicable to the substantive aspects of the dispute and the procedural mechanisms that facilitate the resolution of all difficulties that may arise during the process of the Arbitration. The majority of civil law and common law on Arbitration has provided a very flexible system to Arbitration whose main objective is to ensure a maximum validity to the Arbitration clause.

¹⁶⁷ Article 2 of the Tunisian Arbitration Code, article 7 of the UNICITRAL model Law. id

168 Kessler, A., "Arbitration of intra-corporate disputes under New York Laws", Arbitration Journal, 1964 vol 19, page 1.

169 Cohen, D., Arbitrage et Société, librairie générale de droit et de jurisprudence, 1993

¹⁷⁹ EL Ahdab, A.H, L'Arbitrage dans les pays arabes, préface de J. ROBERT, Economica 1988, p 751

In Company law field and particularly the law governing merger transaction, many civil law systems (litre in Tunisia for e.g.) lactr special Arbitration rules settling company law disputes procedures that are separate from rules of Arbitration under ordinary law governed by the national legislation on Arbitration, excepting, it Italy.

The Italian experience in this regards can provide a best example that need to be stressed. The Italian legislator has recently adopted special Arbitration procedures settling Company law disputes that are separated from Arbitration rules under ordinary law¹⁷¹.

Article 34 of the Italian decree-law states that "the Arbitration clause included in the instrument of incorporation is to apply to all disputes between the shareholders themselves or between shareholders and the company"¹⁷² as well as "applying to all shareholders, including those whose shareholder status is the subject matter of the dispute"¹⁷³ . According to Ricci, the special arbitration procedure implemented by the company law reform, seem to view arbitration as a mean of dispute resolution within an organized corporate structure¹⁷⁴. Reforms in this matter at national level are required!

When arbitration clause is used, the process of Arbitration generally concludes with a decision called "award"¹⁷⁵. The arbitral award is comparable to a litigated judgment and is enforceable. Arbitration may offer the best legal framewortr for non binding ADR techniques, such as mediation it that it guarantees a resolution of the dispute and serves as incentive to reach a fair solution on agreed terms. The finality of any agreement reached in the ADR procedures can be improved by requesting the arbitral tribunal to issue an "award on agreed terms".

¹⁷¹ Italian decree- Law n° 5/2003 dated on the 17 of January governing company Law disputes that applies to business corporations

¹⁷² Sub section1 of the article 34 of the Decree. Id

¹⁷³ (sub section 3 of the article 34 of the Decree: "The Arbitration clause may also be expressly extended to apply to disputes involving directors, liquidators and management auditors, with the clause becoming binding up on them as soon as they agree to assume their duties

¹⁷⁴ Ricci, E.F , "Il nuovo arbitrato societario", in Rivista Trimestriale Diritto Processuale Civile, unidroit library , Rome , 2003

¹⁷⁵ "sentence arbitral", in French Law and Tunisian law , "lodo arbitrale" in Italian Law (translation)

Such an award will have the same effect as any regular arbitral award. In the event of a failure to reach an agreement, the arbitral tribunal presents a significant advantage in that it is bound by the arbitration clause and will guarantee a decision and will respect the opinion rendered by the mediator in the preceding ADR procedures. Many institutional arbitration procedures and model rules provide for the inclusion on non-binding procedures as preliminary mediation¹⁷⁶.

However, in practice, when arbitration and mediation are combined, this can presents serious disadvantage in that when the two processes are integrated into the framework of a single dispute resolution system, the danger is to confuse two potentially incompatible roles. The most effective way to overcome this danger is to have different persons perform the two tasks. The risk of compromising the procedural integrity of arbitration and challenging the award on the grounds of a confusion of the two roles will be eliminated. This means that mediation and arbitration can be combined to the extent that they are integrated into a single framework, but that they still have to be conducted as separate processes.

Before going further in this issue, another approach, directly inspired by the American business practice, need to be stressed. It is about what American scholars call "the phased dispute resolution process". Companies and their lawyers are more and more considering in their contract the inclusion of a dispute resolution clause that combines nonbinding ADR procedures with arbitration. To what extent this approach could be applied in practice in other legal systems, such as in Tunisia remain to be seen.

¹⁷⁶ Rule 10 (3) American Arbitration Association (AAA)rules

B-towards multi step dispute resolution process (The American Approach)

Based on American practice, many U.S. companies have moved toward the use of what they call "multi-step" or "layered"¹⁷⁷ dispute resolution clause. The inclusion of the "multi-step" or "layered" clause in business-to-business agreements reflects sound legal and business dispute resolution planning that is not easily "exportable" elsewhere.

The philosophical foundation behind the "multi-step" clause is to preserve business relationships while pursuing appropriate conflict resolution. Its main goal is to maximize the opportunities to continue party-controlled resolution processes. The "multi-step" clause provides process stages that will guide the contracting parties through their inevitable future conflict. A multi-step dispute resolution clause provides for sequential stages of dispute resolution. It typically provides for a period when the parties engage in a consensual process such as negotiation or mediation before resorting to Arbitration. It was stated that the rationale underlying such an approach is that the negotiation or mediation stage affords the parties an opportunity to develop creative solutions before investing time and money in adversarial process such as arbitration¹⁷⁸.

A multi-step dispute resolution clause should be included at the time that the parties enter into the agreement that memorializes their business deal. The clause should be drafted by experienced, specialized attorneys and should appoint a specific institute to manage the dispute resolution process.

¹⁷⁷ Dobbins, R., " The Layered Dispute Resolution Clause: From Boilerplate to Business Opportunity ", published in the Hastings Business Law Journal in April 2005. (West Law) the author is a mediator, arbitrator, discovery referee, and facilitator of disputes ranging from domestic and trans-national commercial and business matters.

178 Dobbins, id

In the merger context, what kind of strategies do merging companies develop to ensure that disputes which arise during or after a merger do not ruin the process? What can be done when an already merged company - A discovers that B has given some wrong information during due diligence? We suggest to work-out the following structure of legal framework to facilitate the rapid fusion of the transaction which consist of a merger dispute resolution program (MDRA)¹⁷⁹ that include a MDR Agreement that refers to clauses which parties to a Memorandum of Understanding or merger agreement may insert to instruct disputes that may arise from their contract. Representatives of merging companies should increasingly include these multi-step clauses during the negotiations of the merger agreement.

It remains to be seen whether the multi-step resolution concept will be adopted in practice.

179 See details of the DRP in appendices n°11