United States: What To Know Before Going Into Arbitration

The below chapter was published in International Comparative Legal Guide's International Arbitration 2017. View the full publication here.

As arbitration has become an increasingly popular method for resolving business disputes, international caseloads have been rising at almost nine percent a year (https://globalarbitrationnews.com/global-arbitration-cases-still-rise-arbitral-institutions-caseload-statistics-2015/). Arbitrators routinely decide cases worth hundreds of millions or even billions of dollars and arbitration is frequently billed as being cheaper and faster than litigation, with the added benefits of privacy, shorter timelines and finality. An arbitrator (or panel), although obviously bound by the operative law and the contractual or other framework governing the parties' relationship, may find greater latitude in weighting the relevant business realities and financial perspectives that are brought to bear in the arbitration hearing. An arbitrator's decision is typically sealed and represents the last word, with limited rights of appeal.

Those advantages can become disadvantages for the unwary, however. To ensure the process is fair to all parties and limit the odds of a successful appeal to a court, arbitrators may be inclined to give more latitude to the parties throughout the process and allow more oral and other evidence to be presented than their judicial counterparts in a typical open-court setting. That possibility has the potential to slow the process (both before and at the hearing), increase costs and delay the ultimate decision.

Before entering an arbitration agreement, each party must therefore carefully consider various trade-offs between arbitration and a court or other venue. For example, the process could be faster in arbitration yet take longer and cost more than one might have thought at the outset. Though there may be comfort in having some control over arbitrator/panel selection (in contrast to a judge being assigned to the case), the arbitration and range of evidence allowed may nonetheless become expansive. Separately, while maintaining privacy over business information, past conduct and the decision itself may be welcome, a court-decided public decision sometimes has precedential benefits too.

With that in mind, we offer some comments below from our experience as an expert witness in numerous venues, jurisdictions and types of disputes, a neutral expert retained directly by an arbitrator, a sole arbitrator, a panel member, and finally a non-testifying consultant to one party in a dispute. In particular, we offer comment on some of the issues to consider before entering into an agreement to arbitrate disputes.

1. The Arbitration Clause. Broadly defined, arbitration clauses identify specific disputes that will be resolved through arbitration as part of a larger agreement or contract. Anything not specified in the arbitration clause is subject to litigation. Arbitration clauses control resolution of a wide variety of disputes, over everything from construction contracts to the consequences of allegedly misappropriated intellectual property. Agreements relating to the purchase and sale of a business often contain detailed arbitration clauses covering, among other things, post-sale working capital adjustments and earn-out agreements. Those arbitral clauses, if broadly written, often also come into force when a wide variety of post-transaction "problems" arise, including those pertaining to representations and warranties, due-diligence obligations, and other commitments.

Beyond what might be specified in any agreement, parties can also agree to arbitrate practically any element of a dispute. If they use vague or overly broad language in the documentation that governs the arrangement between them, however, the proceedings can get sidetracked by arguments over what will be decided in arbitration and what belongs in court. If the dispute is not over one of the elements defined in an arbitration clause, one implication may be that it lies outside the clause and must be resolved through normal-course litigation. The more complicated the transaction, the more detailed the arbitration clause may have to be to protect both parties against unanticipated litigation.

The arbitration clause governs all aspects of the resolution process and should cover: the venue; the number of arbitrators: one versus a panel of three or more; composition of the arbitration panel, e.g. lawyers, accountants, engineers or industry experts; and source of the arbitrators and procedures to be followed, such as arbitration associations or ad hoc procedures to be dictated by the arbitrators with or without consent of the parties.

Arbitration clauses can go into even deeper detail, such as specifying how evidence and written submissions will be presented to the arbitrator, which issues will be discussed in live hearings, how much time will be allotted for the proceedings, and whether the arbitrator will issue a summary decision or one that includes the reasoning of the arbitrator or arbitrators.

Many of these details can be worked out by the parties and their attorneys/counsel before initiating arbitration proceedings. But it is useful to remember that by the time a dispute escalates to arbitration, one or both parties may be disinclined to cooperate even on routine matters, delaying proceedings and increasing the cost. The simple phrase "directions to be agreed upon by the parties" may leave both sides open to unexpected and expensive challenges later.

All of these issues need very careful attention even though they may seem less important when the parties are "friendly" and doing business together. They present risks that may come back to haunt if or when disputes arise later.

2. Cost. Contrary to conventional wisdom, arbitration is not always cheaper than litigation. Arbitrators may not be bound by the same rules of evidence as judges in civil courts and may be inclined to allow almost any evidence or testimony the parties consider meaningful. Similarly, they may not be bound by limitations in court time or court-imposed schedules that are often seen in many jurisdictions. In complex international cases, that could mean extended hearings in far-off jurisdictions and the need to fly in both fact and expert witnesses from around the world for extended time periods, plus multiple expert reports, reply reports and sur-rebuttal reports, costing hundreds of thousands of dollars. It could also mean many days of live testimony requiring attendance by general counsel and business leaders who have carriage of the case for their respective employers, a huge distraction from their regular day jobs.

Agreeing to a panel of arbitrators can also result in multiple starts and stops due to scheduling conflicts that rarely arise when a single judge oversees a proceeding, all of which add to time and costs required for completion. Choosing an arbitration association's site for the hearings can also cause scheduling difficulties.

The arbitration clause may address the possibility of awarding of legal fees and other costs of the action or that may be the purview of the arbitrators themselves: a further important consideration at the outset.

3. Time. In theory, arbitration moves faster than litigation. But, in reality, some elements of arbitration can lead to a slower process. In litigation, judges often put strict time limits on discovery, and trials are typically conducted over a specified number of consecutive days, often dictated by the trier of fact. Arbitration can proceed in fits and starts according to the schedules of the parties and the arbitrators. While there may or may not be an oral discovery process and the document production phase may or may not be somewhat truncated in arbitration, if the arbitration agreement (or the arbitrator) allows it, the parties can lengthen proceedings by calling extensive fact witnesses and experts at the hearing and conducting extensive cross-examination of the other party's witnesses.

Hence, one must think carefully about the evidence that will be required to present a case, and how long it will take to gather the information. The availability of fact witnesses (who were present at an event in the past or who may have participated in a transaction, etc.), the form in which the productions will be available and provided (electronic or hard copy), the availability of data and e-discovery process issues all could lengthen the arbitration process.

As an example, does the arbitration agreement require that financial analysis be based only on audited financial results and, if so, when will final financial statements be available? Are the experts available immediately or will the proceedings have to be scheduled according to their availability and other commitments? Some cases may involve a multitude of experts from around the world. While an arbitrator may only infrequently get involved with discovery orders, the agreement may allow for additional experts along with their reports which are then followed up with rebuttal, all of which add even more time and cost to the process. We have been involved in arbitrations in which documents continued to be produced and expert reports continued to be exchanged well after the (extended) hearings began, irrespective of the original expectations of the parties.

If a disputed transaction occurred years earlier, plan on spending more time identifying and contacting witnesses and obtaining documents. A dispute over construction completed a decade ago may become a time-consuming effort to pull together engineering documents, testimony and other evidence. Though these issues may also be faced in ordinary litigation, they may be heightened in an arbitral context.

And what about the arbitrator? Sought-after arbitrators have their own scheduling issues, but they may well be worth waiting for. And remember even the process of selecting an arbitrator or arbitration panel can take time – weeks if not months in the case of a three-person panel and particularly where the two party-proposed arbitrators pick the third.

Some arbitrators follow their judicial counterparts and enforce strict time limits on proceedings, either on their own or by agreement among the parties. That raises additional questions and tactical decisions. Will your experts be able to present their evidence in chief so that they can "engage" with the arbitrator, or only under cross-examination? If the latter, make sure the written evidence they submit to the arbitrator is clear, compelling and perhaps deals directly with every possible argument from the other side. Your expert will not get a second chance to convince the arbitrator, except under the pressure of cross-examination.

4. Finality. An arbitrator's decision is often final, with appeal rights limited in many jurisdictions. That finality is most often tested in cases where the arbitrator disallowed or refused to hear relevant evidence that one party argues should have been allowed.

The prospect of appeal on such grounds leads many arbitrators to give the parties wide latitude to present their cases. Experts may be allowed to cover more ground than under the strict rules of evidence in a court setting, and in our experience arbitrators may be more inclined than judges to question witnesses directly (presumably to test their own thinking on the various issues and canvass the real business perspectives that ought to be brought to bear in a fair and equitable decision).

Finality and privacy may be interrelated issues. As noted earlier, both parties may be attracted to an arbitral setting to ensure finality and privacy, not only over the ultimate decision and dollars that flow from it, but also over their own business practices, conduct, documents and other evidence that may attract unwanted attention from various other parties – the press, competitors, tax, antitrust and other regulatory authorities, to name a few.

5. Selecting the arbitrator. The process for selecting a presiding arbitrator is often defined in the arbitration clause. Typically, the two sides specify qualifications, or work it out in pre-arbitration negotiations.

The choice of an arbitrator depends on the nature of the dispute. If it only involves an accounting question, such as the proper application of accounting principles as they may apply in the calculation of working capital on the close of a transaction, an arbitrator with accounting or finance experience in that particular industry might be best. Valuation experts frequently serve in disputes over the value of a business and financial losses arising from any number of contract breaches and tort matters, including, for example, those arising from intellectual property infringements. If the dispute is likely to involve legal and procedural questions and decisions, a lawyer might be the best choice (either as sole arbitrator or for at least one position on a panel). Similarly, retired judges know how to run a hearing process efficiently and can obviously deal with not only the legal issues (assuming familiarity with the governing law of the relevant jurisdiction), but also other non-legal determinations that must be made. Non-lawyer arbitrators may have to rely on counsel for the veracity of their respective legal submissions. That still may be better, however, than asking a retired judge to decide a complicated dispute over, for example, inventory valuations or other issues that fall squarely within the experience and scope of expertise of a valuation or other professional practitioner.

Some arbitration agreements specify that arbitrators must come from a specific type of accounting firm (such as the Big 4) or arbitration association. It is worth considering broadening the selection with a focus on industry knowledge, experience and skills in a dispute-resolution setting. Any arbitrator should also have extensive experience resolving complex disputes. Arbitration can be highly contentious and a skilled decision-maker is essential to sort out the "wheat from the chaff".

Make sure to include full opportunities to vet candidates (and especially those proposed by the other party to the dispute), including examining their past decisions, subject-matter expertise and perhaps geographic experience. Brace for higher-than-expected costs. Selecting the third arbitrator in a high-stakes case, where the parties each pick one arbitrator and those two choose the chair of the panel, can cost a substantial amount of money – and that is before the arbitration begins in earnest. In large disputes, it is not unusual to see dozens of resumes before finding the right person to decide a case. And it can be helpful to canvass not only your external counsel but also your business people and financial and other experts. Each may have important perspectives on how certain arbitration experience might be helpful to the process.

6. How many arbitrators? This can be a critical decision. One arbitrator puts the fate of your case in the hands of a single decision maker – not unlike a judge in a court context (though clearly different than a jury if that might otherwise be applicable in the jurisdiction of the dispute). If cost and speed are important, a single arbitrator may be the best option. But if the questions are complex and require multifaceted expertise, a three-arbitrator panel could be better. Remember that a lot of good decision-making, canvassing of the issues and re-hashing of the evidence goes on behind closed doors. A panel of three obviously makes for a more robust discussion than any sole arbitrator can have with himself or herself! Ideally, the arbitration clause will specify how and when those decision-makers will be selected as well as the necessary qualifications.

If three arbitrators are specified, the parties usually each propose one and the two arbitrators pick the third. This leads to the widespread but mistaken assumption that the third arbitrator is the decision-maker – and one that neither party had direct input in selecting. In truth, that is rarely the case. Often the third member of the panel is a lawyer, making it imperative to select an arbitrator with meaningful business or industry knowledge and experience, an ability to synthesize all the facets of the case and excellent communication skills.

Arbitrators sometimes retain their own experts to help them understand complex accounting, financial, engineering or other technical questions from a neutral party who speaks the same language as the experts called by the parties themselves. That adds cost, of course, but can also improve an arbitrator's understanding of the underlying issues, and thus the quality of the thinking and decision process. In such circumstances, the experts on both sides may be more attuned to the fact that whatever they submit and say in the proceeding will be scrutinised by one of their peers.

7. Experts. Many arbitration processes include expert witnesses who provide technical perspectives on the financial, accounting, industry, engineering or other facets of a complex dispute. The nature of the dispute drives the necessity of expert witnesses and many of the considerations for choosing an arbitrator are relevant here, too. Strong communication skills, familiarity with the formal rules of the arbitration process and prior experience as an expert witness are key considerations, in addition to the specific domain knowledge. There is no substitute for quality when it comes to the independent expert that one retains. In larger cases, however, there may be ample reason to also retain a consulting expert who will not prepare any formal reports and will not give evidence at the hearing. The testifying expert may not even know that a consulting expert has also been retained. Counsel will obviously be the "quarterback" on these and related decisions, but in our experience, a consulting expert can often be invaluable to the process – not just from an advocacy perspective, but also by virtue of their experience and expertise, they may be able to help distill issues, assist with documentary production issues, assist with strategy and assess exposures in ways that both client and counsel may find hugely beneficial, without distracting or tainting the independent testifying expert.

8. Hearings or written submissions? With non-complex disputes, the fastest way to conduct the arbitration is by limiting the evidence to written submissions to a single arbitrator. Oral hearings introduce all the complications and cost factors discussed above, but the ability to present oral evidence and cross-examine is more appropriate for more complicated disputes. For a trier of fact, there is no substitute for "seeing the whites of the eyes" of any fact or expert witness in chief and cross-examination. No written submission can fully convey the factors involved in, for example, valuing a lost opportunity to supply pressure tubes to nuclear reactors around the world, or the intricacies of the supply sources for technetium to produce medical isotopes, or all the details of any complex cross-border transaction. Questions inevitably will arise and it's better if your expert can answer them directly, convincingly and in person.

9. International arbitration. Arbitration can be an effective way to bring disputes over cross-border transactions to a central forum with impartial decision-makers and predictable rules, but only if you specify both the venue and the specific law that will apply and govern the business relationship of the parties that is at issue. Failure to specify (or limit) at the outset which jurisdiction's laws will govern the proceedings can rapidly lead to expensive procedural disputes.

For example, what can't be anticipated so easily is how the tax laws in a given country will interact with the accounting definitions used in a post-sale adjustment to drive a different value for a business unit. Be prepared to hire local lawyers, accounting experts and translators to assemble the evidence you need to convince a panel of arbitrators hearing a dispute in a particular country that the other side's position is wrong.

10. Know your audience. Every arbitrator has a unique combination of expertise, professional background and personal style that must be considered. How familiar is the arbitrator with certain terminology? Will they respond best to technical language or layman terms? Do they prefer exhaustive reports or bullet points? What kind of questions do they ask?

All these questions become more difficult when there are multiple arbitrators. To which style do you respond? Who is the ultimate decision-maker, and does your approach work with that arbitrator?

Conclusion

Arbitration has compelling advantages over litigation, but like any legal procedure, it requires a high degree of foresight and planning in order to yield success.  The less you specify in the initial arbitration agreement, the more control you cede over the proceedings and the more likely you will encounter unpleasant surprises, or at least a path that you cannot control, when a dispute emerges.