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'Adverse inference' could be drawn from company buyer's refusal to disclose documents, says court

ANALYSIS: A ruling by the Paris Court of Appeal has shed light on a wider than usual application of the adverse inferences principle by upholding an arbitrator's ruling that it was fair to infer from a company's refusal to disclose documents that a company knew more about a transaction than it claimed.27 Apr 2017

This judgment is important because the 'adverse inferences' principle is normally relied on against a seller who may have a commercial interest in not sharing certain documents with a buyer. However this recent case shows that it can now bite a buyer as much as a seller.

This case shows that it is unwise for any party to pretend not to know something, while at the same time refusing to disclose documents. Indeed courts might not look too kindly on a lack of cooperation or good will.

Many questions remain unanswered including to what extent arbitral tribunals will now draw adverse inferences without being prompted by one or both parties. It will be interesting to see how far arbitral tribunals and courts will go in this direction, and whether this wider approach will only apply in a civil law context, or more generally across other jurisdictions.

The case concerned the purchase by Texan oil industry supplier Dresser-Rand of shares in Spanish group Guascor, a supplier of diesel and gas engines, from its 12 Spanish shareholders. 

Although the parties were nearing completion, they still needed to agree on the final price for the sale of the shares. If they failed to agree, the contract, which was governed by French law, said that they would have to appoint an expert to determine what the price should be. On completion the parties still disagreed on the final price and Dresser-Rand sought the appointment of an expert to establish the correct price. At the same time, the Spanish sellers initiated arbitration against Dresser-Rand following the failure to agree a price.

Under the contract the sellers were obliged to provide "exhaustive and sincere" accounting documents of the company they were selling, including any subsidiaries. Dresser-Rand claimed that the sellers breached that obligation when they failed to properly disclose a debt belonging to one of the subsidiaries. Dresser-Rand said that the undisclosed information should have been taken into account by the expert when determining the final price. The sellers, on the other hand, argued that Dresser-Rand already knew about the debt before the two parties exchanged contracts, and that it should not be taken into account in determining the price.

The arbitral tribunal agreed with Dresser-Rand that the sellers had breached their obligation to provide exhaustive and sincere accounting documents and that this debt should have been disclosed to the expert. It also concluded, however, that the expert should have disregarded the debt in assessing the price because Dresser-Rand already knew that the sellers had breached their obligation in that respect.

Surprisingly, the arbitral tribunal reached this conclusion by drawing adverse inferences against Dresser-Rand following its conduct during the disclosure phase of the arbitration. Adverse inferences are conclusions a tribunal can reach if it believes that a party is refusing to disclose a document because it may be against its interests. Dresser-Rand was asked to disclose legal advice as well as reports prepared by KPMG and UBS during the negotiation stage of the transaction but failed to do so.

Dresser-Rand appealed the decision to the Paris Court of Appeal, which upheld the award. In particular, the Court confirmed that adverse inferences could be drawn from Dresser-Rand's refusal to disclose the KPMG and UBS reports and that it was therefore likely that Dresser-Rand already knew of the sellers' breach.

The arbitral tribunal was able to use the principle of adverse inferences because it was contained in the International Bar Association (IBA) rules, which the parties had agreed the tribunal could use. 

Normally, before being able to use a principle of this nature, a tribunal must first ask for the parties' permission, or the principle must have been raised by one of the parties. In this case, Dresser-Rand argued that the tribunal should have asked the parties before making use of the principle.

However the Court of Appeal said that the parties had expressly agreed to the use of the IBA rules during the procedure and as neither party had objected to it the tribunal was entitled to draw adverse inferences in its decision without seeking the parties' permission.

Leonardo Carpentieri is an international arbitration expert with Pinsent Masons, the law firm behind Out-Law.com