How CPAs Can Participate In The Arbitration Process
- Nov 12, 2015
Editor: What is arbitration?
EisnerAmper: Arbitration serves the same purpose of, but is an alternative to, courtroom litigation as it is an alternative method of resolving disputes in a fair and equitable way outside of court. Parties refer their disputes to an arbitrator who reviews the evidence, listens to the parties, and then makes a decision. The arbitration process is less formal than a courtroom trial. Most arbitrations arise because of an arbitration clause in a contract, in which the parties have agreed to resolve any disputes arising out of the contract through arbitration. Arbitration clauses can be simple – stating that claims will be settled according to applicable arbitration rules and then enforced by a local court; arbitration clauses can also be more complex, controlling a large number of matters, such as how arbitrators will be selected, where the arbitration will be held, who will pay for attorneys' fees, and whether the final arbitration award must be kept confidential.
Editor: Why should a business choose arbitration over litigation?
EisnerAmper:There are many reasons. First of all, traditional courtroom litigation is notorious for being slow, cumbersome and costly. Arbitration is designed to provide a much more efficient and economical resolution to the same disputes that would otherwise have to be decided in a court of law. Over the past five years, large organizations that provide alternative dispute resolution (“ADR”) services have been making a tremendous effort to educate their arbitrators in methodologies to insure that arbitrations are, in fact, more efficient and economical than cases tried in court.
A second advantage of arbitration is that in a trial by jury, the jury award is completely out of counsel’s control and could be outside the realm of reasonable damages. Arbitrators are limited by the contract as to what they can award. Juries have more leeway.
Third, in arbitration, the parties get to select the trier of fact, that is, who will hear and decide the case. In a traditional litigation, the judge is assigned almost randomly and the members of a jury are chosen, in most part, by chance. For many, this is arbitration’s greatest advantage.
Fourth, arbitration is almost always private, and there is no publication of the result, while courtroom decisions are a matter of public record. So, if confidentiality is an important factor, arbitration is preferable.
Fifth, arbitration verdicts are binding, and they are almost impossible to appeal – which may be considered a positive or a negative, depending on your point of view – whereas in courtroom litigation you always have the right of appeal, which could lead to more uncertainty. There are very few circumstances under which a court will reverse an arbitrator’s decision. If the opportunity to appeal is important to you, arbitration would not be the route to take.
Sixth, when you bring a case to court, the judge or the jury may have no experience whatsoever in the area that is being litigated. When you chose an arbitrator, you can choose somebody who does.
Seventh, in arbitration, the parties can make it as complex or as simple as they want, limiting discovery and depositions to speed the case along because you do not have to follow all the rules of evidence and the rules of civil procedure.
The eighth reason is that overcrowded court calendars are an issue. If you go through the court system, it may take many months before you get a court date. Arbitration moves much more quickly. Once you select the arbitrators, you can really significantly narrow the timeframe before you get to the final award or determination. Arbitration hearings can usually be scheduled around the needs and availabilities of those involved, including weekends and evenings. The government and courts are major proponents of arbitration. They see it as a very fair and equitable way of resolving disputes, and it certainly goes a long way to relieving court calendars.
Editor: What are the most common criticisms of arbitration?
EisnerAmper:The major criticism of arbitration arises out of the perception that arbitrators will simply split the difference, known as “splitting the baby,” which means that if the suit is for $20 million dollars, the arbitrator will simply award $10 million. In our experience, the reality is very different. Arbitrators do try to award based on the merits of the case, and there is almost always an absolute determination or award in favor of one party or the other. As a matter of fact, studies of awards conducted by the American Arbitration Association find no propensity for such split decisions. The studies have found that arbitrators ruled clearly in favor of one side or the other in 93 percent of the cases.
Editor: What about costs? Some arbitrations can cost as much as litigation.
EisnerAmper: Sometimes arbitration can cost almost as much as litigation. However, arbitration was initially designed to be more efficient and economical than traditional courtroom litigation. The major players in arbitration are making great strides in getting that to be the reality and, more often than not, arbitrations today are less costly and more efficient than traditional litigation. However, there are costs attached to arbitration. Each side has to pay their attorney, and the cost of the arbitrator (or, in some cases, a panel of three arbitrators) is usually split between the parties. There are fees for a court stenographer and for rental of the arbitration hearing room. If you are using one of the large ADR organizations, they will charge an administrative fee as well.
Editor: When can an arbitration award be overturned by a court?
EisnerAmper: Arbitration awards can be challenged in court, but these awards will only be overturned by the court in rare and limited cases. Courts will vacate, or refuse to confirm an arbitration award if the award is the product of fraud, corruption, or serious misconduct by the arbitrator. In order to have an arbitration award vacated, it is usually necessary to demonstrate at least one of the following in court: there was a serious conflict of interest on the part of a neutral arbitrator; the award was not final and thus failed to constitute a definitive end to the issue; or the award covered an issue that was outside the scope of the arbitration agreement.
Arbitrator fraud or misconduct claims are rare because actual evidence of arbitrator misconduct is hard to come by. Further, when courts are faced with motions to vacate an arbitration award, they will generally only look at the procedural details of the arbitration, not the substantive details. This means that courts won’t look at the merits of the case unless the claim involves the award itself being unreasonable or unethical. Ultimately, fraud is very unlikely to be a winning argument in court unless there is definitive evidence. An arbitrator’s binding decision isn’t fraudulent just because it’s unfavorable.
On a similar note, you are unlikely to get a court to overturn an arbitration award simply because the arbitrator interpreted the law differently from how a court might have. Even clear mistakes of law or fact sometimes will not justify an arbitration award being overturned, hence the significance of the term "binding" in binding arbitration. In addition, courts are often reluctant to overturn arbitrator awards since doing so can reduce the usefulness of arbitration as an ADR mechanism.
Even if a court would have decided the case differently under existing law, it will still usually enforce an award. One possible exception occurs when an arbitration award or decision is vacated because it violates public policy. However, these grounds for overturning an award have not been advanced very often, and they have succeeded in few cases.
The Federal Arbitration Act (FAA) established a strong federal policy in favor of arbitration, requiring courts to rigorously enforce agreements to arbitrate. However, the FAA does authorize a district court to vacate an arbitral award where the arbitrators exceeded their powers. If an arbitrator goes beyond that self-limiting agreement between consenting parties, he acts inherently without power, and an award ordered under such circumstances must be vacated. However, in order to vacate an award on this ground, it is not enough for petitioners to show that the arbitrator committed an error – or even a serious error. Rather, it is only when an arbitrator strays from interpretation and application of the agreement and effectively dispensed his own brand of industrial justice that his decision may be unenforceable. If the parties agreed to submit their dispute to arbitration, a court will uphold a challenged award as long as the arbitrator offers a barely colorable justification for the outcome reached.
Some courts have vacated arbitration awards that are in manifest disregard of the law. Awards are vacated on these grounds only in those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent. Proving that an arbitrator acted in manifest disregard of the law requires a two-part showing. First, the court must consider whether the governing law alleged to have been ignored by the arbitrator was well defined, explicit, and clearly applicable. Second, the court must consider whether the arbitrator appreciated the existence of a clearly governing legal principle but decided to ignore it.
Editor: When are arbitrations mandatory, and when are they voluntary?
EisnerAmper: If upfront you enter into a contract for one party to perform services to the other, and in that contract the parties agree to an arbitration provision that requires any dispute between the parties arising under the agreement to be arbitrated, then arbitration is mandatory. If you run into a dispute later on, the court will always uphold the agreement of the parties that the dispute is to be resolved by arbitration. A dispute that is subject to mandatory arbitration must be resolved through arbitration. The parties give up their right to sue in court, participate in a class action lawsuit, or appeal the arbitration decision.
If an arbitration provision is absent from an agreement, then it is voluntary on the part of the parties whether they choose to resolve their dispute via arbitration or litigation. In voluntary arbitration, both sides in a dispute agree to submit their disagreement to arbitration after it arises, and after they have evaluated other options for resolving it. Most consumer advocates find this to be the preferred, evenhanded approach to arbitration — allowing it to be a choice rather than a necessity.
Editor: How are arbitrators chosen?
EisnerAmper: It can be one of many ways. If you use one of the organizations that render ADR services, such as the American Arbitration Association or JAMS, generally they will select a number of potential arbitrators from their panel of arbitrators, and you then choose from that list. In some cases, you can request arbitrators with particular backgrounds. Outside these organizations, generally the parties themselves pick the arbitrator, and arbitrators are usually selected by reputation, their specific skill sets, or their experience with similar kinds of cases. If there is to be a panel of three arbitrators, most often each party selects its own arbitrator, and the two “party-appointed arbitrators” select the neutral, third arbitrator.
Editor: Is it more common to have one arbitrator or a panel of three?
EisnerAmper: It's about 50/50, and there really is no rule of thumb for either. The arbitration provision in an agreement very often will dictate whether the case should be heard by one neutral arbitrator or by a panel of three arbitrators. Different organizations providing ADR services have different policies as to this issue and, if you are in a regulated industry, that industry may dictate if there will be one arbitrator or a panel of three arbitrators.
Editor: What role can CPAs play in arbitration?
EisnerAmper: Where a CPA is engaged as a testifying expert, he or she can testify in that capacity at a trial or arbitration. In addition, in very complex arbitrations, the arbitrator or panel of arbitrators may need to appoint a “special master” – someone who can be neutral and can help the arbitrator or panel of arbitrators understand the evidence and the technical aspects of the issues or determine a fact in issue because of their technical or other specialized knowledge.
CPAs can also assist attorneys in the drafting of arbitration clauses, which is happening more frequently. To make sure attorneys use correct accounting terminology when such terminology is going to be a part of an arbitration provision, they may retain the services of a CPA to make sure that they are using this technical language correctly. For example, an arbitration clause might read that the arbitrator is to be selected “from a public accounting firm” when what is meant is that the arbitrator is to be selected from a nationally recognized firm of certified public accountants. CPAs can help attorneys use the correct accounting terms or phraseology.
Attorneys also frequently need the help of a CPA in drafting provisions regarding post-closing purchase price adjustment arbitration provisions because of the technical accounting terminology that is often found in these provisions.
The last (and by far the most difficult to achieve) role is to serve as an arbitrator. There are several CPAs who do serve as arbitrators, and many of them are on the panels of the large organizations providing ADR services.
If you have any questions, we'd like to hear from you.
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