Is arbitration a valid alternative to courts to solve investment funds disputes?

Speakers: Françoise Lefèvre and Fabio Trevisan

The conference addressed the question of whether arbitration is a valid alternative to courts for resolving disputes in the context of investment funds, particularly those structured in Luxembourg.

Typical Structures and Disputes in Private Equity Funds

Private equity funds, such as the Reserved Alternative Investment Fund (RAIF), often involve complex structures with multiple actors: fund administrators, investment managers, general partners (GPs), and alternative investment fund managers (AIFMs). These structures can give rise to various disputes:

• Shareholder disputes among fund promoters, often centering on the GP and spilling over to affect investors.
• Investor complaints regarding lack of transparency, poor performance, or losses.
• AIFM-level issues, such as disagreements over net asset value calculations, risk assessments, investment compatibility with offering documents, and asset custody.
• Removal of the GP for cause, which, though rare, can have devastating consequences for all stakeholders and is sometimes the subject of ongoing litigation.

Standard Dispute Resolution Practices

Traditionally, disputes arising from these structures are governed by standard forum clauses that designate the Luxembourg courts as the venue for resolution.

Considering Arbitration: Pros and Cons

The presentation explored arbitration as a potential solution, outlining its advantages:

• Expertise: Arbitrators often have specialized knowledge of fund mechanics and participant obligations.
• Flexibility: Parties can choose the language and seat of arbitration.
• Confidentiality: Proceedings are private.
• Efficiency: Simplified notification procedures and expedited processes, avoiding diplomatic channels.
• Finality: Limited grounds for appeal, with only annulment possible.
• Enforceability: Awards can be enforced globally under the New York Convention.
• Emergency relief: Availability of urgent interim measures.

However, arbitration also has notable disadvantages:

• Consent required: All parties must agree to arbitrate, limiting its use in some disputes.
• Complexity in multi-party scenarios: Difficulty in joining or consolidating cases involving multiple contracts and parties, risking parallel proceedings with conflicting outcomes.
• Tribunal composition challenges: Ensuring equal rights in nominating arbitrators can be problematic in multi-party contexts (as highlighted by the Dutco case).
• Higher costs: Arbitration can be more expensive than court proceedings.

Drafting Effective Arbitration Clauses

One approach is to insert the same or compatible arbitration clauses in all contracts across the fund structure. However, this is challenging in practice:

• Clauses often end up differing, hindering the consolidation of claims.
• Drafting becomes complex due to the need to account for numerous contracts and parties.
• Identifying all related contracts can be difficult.
• Overly detailed clauses may create contractual imbalances.

Inspiration from Other Sectors

The construction industry, which frequently deals with multi-party, multi-contract disputes, offers a model. Large projects involve owners, engineers, contractors, subcontractors, vendors, and certifiers—often from different jurisdictions and under different laws. M&A transactions with multiple sellers and guarantors present similar challenges.

A Better Solution: Standalone Arbitration Agreement

The recommended solution is a standalone, separate arbitration agreement signed by all participants in the fund or project. Key features include:

• All bilateral contracts refer to this central agreement for dispute resolution.
• The agreement is not negotiated but adhered to, preventing divergence between parties.
• Signing the agreement is a prerequisite for participation.
• The agreement lists all signatories and covered contracts, refers disputes to an arbitration institution, and allows the institution to appoint all arbitrators.
• It enables a single procedure involving all parties, with provisions for notifications, joining parties, consolidating proceedings, and cross-claims.
• The agreement can be amended to include new parties as the structure evolves.

This model was first used in the 1990s for the construction of the gas pipeline linking continental Europe to the UK.

Choosing the Right Arbitral Institution

Selecting an institution ready to manage such proceedings is crucial. Organizers should:

• Consult the institution for feedback and suggestions.
• Consider establishing a list of arbitrators with fund expertise.
• Ensure the rules allow emergency proceedings and discuss fee structures.
• Remember that the arbitral tribunal can apply different laws to different contracts.

Conclusion

A tested and effective solution exists for private equity funds: a standalone arbitration agreement tailored to the fund or, ideally, standardized across the sector. While this approach requires careful preparation and anticipation, it offers a robust alternative to last-minute, boilerplate dispute resolution clauses.

Contacts:

Françoise Lefèvre 
Avocat | Arbitration & ADR 
Médiateur agréé en matières civile et commerciale
12A Avenue de la Raquette, 1150 Woluwe-Saint-Pierre, Belgium
+32 475 52 11 44 • Lefevre Arbitration SRL • VAT No. : 0766.998.103
arbitration@francoiselefevre.com  •  www.francoiselefevre.com

Fabio Trevisan
Partner, Bonn, Steichen & Partners
BSP | 11, rue du Château d’Eau | L-3364 Leudelange | Luxembourg
ftrevisan@bsp.lu