| EXECUTIVE SUMMARY | |
A reputation for objectivity and fair-mindedness makes CPAs excellent candidates to become arbitrators. They also have developed the skills to lead the process, identify the issues, encourage the disputing parties to come to settlements and make decisions.
CPAs’ knowledge, skills and consulting experience prepare them to make credible decisions in arbitrations and provide the basis for serving in virtually any business dispute.
Personal liability is one of an arbitrator’s foremost concerns. Obtaining immunity should be the first order of business.
A signed engagement letter, obtained before work starts, should set up the broad outlines of the engagement and provide the means for making sure the CPA is paid.
A separate scheduling agreement should summarize what the arbitrator will do and affirm the process is an enforceable arbitration that entitles the CPA to immunity from liability. Gerald W. Hepp, CPA, MAE, is with Plante & Moran PLLC, and is vice-chair of the board and chair of the audit committee of MIVA Inc., a publicly held company listed on the Nasdaq. He has been involved in arbitration and expert witness services for more than 30 years. His e-mail address is Gerald.Hepp@plantemoran.com . |
as there ever a skill set better matched to the demands of the job? A reputation for objectivity and fair-mindedness makes CPAs excellent candidates to become arbitrators. Their knowledge, skills and consulting experience combine to produce credible decisions in arbitrations involving virtually any business dispute. This article will explain what an arbitrator does, how to prepare to be one and what pitfalls to avoid. Arbitration, which is a form of alternative dispute resolution (ADR), is an alternative to a trial in court. Private arbitrations typically arise from disputes surrounding transactions between two parties. The transaction agreement may call for arbitration in case of a dispute, or the parties may simply prefer arbitration to litigation.
| Average Cost of an Arbitration Total cost (including fees and expenses)
$3,541.62 Source: Federal Mediation and Conciliation Service Arbitration Statistics, fiscal year 2004. |
To understand ADR, you should understand the court process—and the best way to learn about it is by serving as an expert witness. When I got my start, I had been serving as an expert witness for about 13 years in a number of cases involving accounting and auditing matters, and damage and business interruption loss claims. One insurance company apparently believed I showed objectivity and fairness and asked whether I would arbitrate a dispute it had with an insured. Since then I have arbitrated disputes between companies of all sizes, from small businesses to large multinational entities, almost all of them involving disagreements over financial adjustments called for in sales contracts. TAKING CHARGE
There is no set formula for an arbitration. The process is anything the parties and the arbitrator want it to be, with the CPA taking the leadership role. Most often it’s much like a civil trial, though less time-consuming and more streamlined because, among other things, it typically forgoes some of the steps that accompany lawsuits, such as the discovery process and building foundation testimony. But while the arbitrator leads the process, his or her best approach is not to dictate to clients how it will be structured but to lay out the elements that can be included and assist the parties in making rational choices. It’s axiomatic that simple matters don’t require complicated procedures. Nevertheless, the parties should be allowed as full an airing of their issues as they believe is just. At the most basic level, the parties in an arbitration submit their positions—usually in writing—to the arbitrator and he or she makes a decision. Written documents might include position briefs, rebuttals to the opponent’s position brief, post-hearing briefs and rebuttals to opponent’s post-hearing brief. It is probably wise for the arbitrator to establish in advance a reasonable page limit for the documents. (See “ Arbitration Procedures Checklist. ”) | | Arbitration Procedures Checklist Use this list to provide the parties with the procedures and estimated costs. The costs are estimated before any decisions are made on procedures to be followed: | Procedure | Estimated
Cost | | Arrangements and administration of hearing procedures. | $x,xxx | | Arbitrator receives and reviews the papers and documents each party wishes to submit to specify the nature of the dispute and the position of the party as to the appropriate resolution, including appropriate documentation for the proposed resolution. Copies are provided to opposing parties. | $x,xxx | | Arbitrator receives and reviews any rebuttal papers a party wishes to submit. Copies are provided to opposing parties. Note: This procedure and cost can be avoided if rebuttal to opposing party’s position is presented at a hearing. (See below.) | $x,xxx | | Arbitrator holds a hearing where each side presents its position and is allowed to question opponents. The arbitrator asks each side appropriate questions. | $x,xxx | | The arbitration hearing can be formal or informal. At a formal hearing a court reporter transcribes the proceedings and provides transcripts to the parties and the arbitrator. A formal hearing involves the cost of the court reporter and copies of the transcriptions. An informal hearing does not have a court reporter.
| | | Formal hearing | $x,xxx | | Informal hearing | $0 | | The arbitrator receives and reviews briefs from each of the parties with views of what was established at the hearing. Copies of the briefs are provided to opposing parties. (This procedure and cost can be avoided.) | $x,xxx | | The arbitrator considers all the information provided, makes a judgment and submits a written report. | $x,xxx | | |
As an initial step, the arbitrator may have to rule on the issues ultimately to be addressed in his or her decision. This may seem like a relatively straightforward question, but it can become complicated when each party interprets the underlying agreement differently. When the parties disagree about the issues to be arbitrated or the procedures, it may be necessary to hold a preliminary hearing in which each side presents its position. It is then up to the arbitrator to rule on the disputed matters, usually in a written ruling. Even though the arbitrator is retained to make decisions, you will provide better service by encouraging the parties to work out their differences and come to a settlement. Settling even minor issues can be very beneficial, as it permits everyone to focus on what is truly important. However, avoid taking on the role of mediator. Mediation requires working individually with the parties, something arbitrators should not do. Further, the parties need to comply with basic procedural rules. Good arbitrators hold parties’ feet to the fire on this point—or risk losing control of the process. | | Immunity Protection Even when they make decisions that get reversed, judges don’t carry any personal liability to anyone who might claim to have been harmed by them. As an arbitrator, the CPA is entitled to be cloaked with the same immunity. It is important to have each party agree to give that immunity. The first place for immunity protection is the initial engagement letter. The letter sets a tone and understanding that are important to the engagement. Following is appropriate wording to use: It is understood that I will be functioning in the role of a neutral arbitrator pursuant to (identify the agreement or other condition giving rise to the engagement) and the engagement is totally unrelated to any other professional services that may have been or might be provided to either of the parties. While you might think it unnecessary, given the existence of the above language in the engagement letter, it is advisable to include similar language in the recommended scheduling agreement. If the arbitration appointment comes through the federal or state court system, most likely nothing else is required; appointment by a judge should be sufficient. This was clearly established in a Michigan Court of Appeals case that stated: “Hence, regardless of whether Cunningham’s valuations in plaintiff’s divorce case are deemed finding of a master, arbitrator, or even an expert, we hold that plaintiff’s action against Cunningham is barred based on quasi-judicial immunity because Cunningham’s actions arose from his court-ordered appointment to resolve valuation disputes between the parties to the divorce action, a fact-finding function that involves judgment independent of the parties.”
(Unpublished decision December 17, 2002, no. 231712, Oakland Circuit Court, LC no. 98-0009515-NM.) | |
PROTECT YOURSELF
While arbitration engagements can be very satisfying, they do involve potential pitfalls. As with any professional engagement, it behooves the CPA to gain the protection of an engagement letter. Further, using a separate scheduling agreement provides a clear statement of what should be expected in the arbitration process. The engagement letter. The first order of business—before you do any work on identifying the dispute and procedures—is to obtain an engagement letter signed by each of the parties. It should set up the broad outlines of the engagement and provide the means for making sure you get paid. It also should address the important issue of immunity. (See “ Immunity Protection ” for more on this important issue.) Establishing payment procedures is a particularly important concern in arbitration. Usually each party pays half of your fees, but if one feels cheated by your final decision, you may have to resort to legal action to collect. If the disputants are large, well-established entities with good reputations, you may feel comfortable billing at the end of the engagement. With smaller, unknown parties, you may want to require a substantial retainer before you begin. It’s also possible to ask the parties to pay your final bill before you release your decision. This works even when the losing party will pay the entire cost of the arbitration: You collect one-half from each of the parties before the decision, and the winning party must then collect from the losing one. This assures you don’t have to chase the loser for your fee. The scheduling agreement. Once you have the engagement letter and have scoped out basic details of the assignment, I recommend getting a separate scheduling agreement that summarizes what the arbitrator will do and affirms that the process is an enforceable arbitration that entitles you to immunity. Following is an appropriate format: “(Party 1) and (Party 2) have entered into (title of agreement between the parties that is in dispute) dated (date). A dispute has arisen in connection with that agreement. The parties have engaged (arbitrator’s name) to arbitrate the dispute between them. The parties agree to the terms and conditions stated herein. Further, the parties agree this arbitration is separate from and unrelated to any other professional services that may have been or might be provided to any of the parties, and that the arbitrator is hereby granted arbiter immunity for this engagement. The parties agree the decision of the arbitrator shall be final and binding and that judgment upon the award rendered may be entered in any court having jurisdiction thereof.
Then include details of the procedures to be followed. (See “ Arbitration Scheduling Agreement .”) | | Arbitration Scheduling Agreement General
(party) and (party) have entered into (agreement name) dated (date). A dispute has arisen in connection with that Agreement. The Parties have engaged (arbitrator’s name) to arbitrate the dispute between the parties. The Parties agree to the terms and conditions stated herein. Further, the Parties agree that this arbitration is separate from and unrelated to any other professional services that may have been or might be provided to any of the Parties, and that Arbitrator is hereby granted arbiter immunity for this engagement. The parties agree that the decision of the Arbitrator shall be final and binding and that judgment upon the award rendered may be entered in any court having jurisdiction thereof. Issue to be Decided By Arbitrator
(Describe) Scheduling
The following tentative schedule will be followed:
(Due dates for briefs and witness lists. Date of hearing) Hearing Procedures
Formality
The Hearing will be informal and court procedural rules will be followed only in a very general sense. Objections may be raised to questions of witnesses and to documents. The Arbitrator will rule on any such objections. There will be no transcript of the Hearing unless requested by one of the Parties. The requesting Party is responsible for making the arrangements, advising the Arbitrator and Opposing Party seven day prior to the Hearing, and providing a copy of the transcript to the Arbitrator. Variations in the Hearing procedures agreed to by the Parties will be honored by the Arbitrator. Order
For purposed of the Hearing, (party) will be treated as the initiator and will present its position first. Each Party will be permitted a short opening statement at the beginning of its presentation. After each side has presented its position, each party will have an opportunity for a rebuttal presentation. After presentations, each Party will be given time for a short summary of its position. Witnesses
Each side will be permitted to present witnesses it has identified in the scheduling process. Witnesses will (not) be required to testify under oath. Witnesses will be subject to cross examination by opponents and may be questioned by the Arbitrator. Arbitrator questions of the Parties will be asked when deemed appropriate. Post Hearing Briefs
Post-Hearing briefs will (not) be allowed. (Signatures of Parties and Arbitrator) | |
ORGANIZATIONAL MATTERS
There are a number of other issues to be considered in connection with arbitration procedures. Facilities. Some arbitrations require only a hearing room. For more complicated ones, especially if they will run for several days, plan for additional space so the parties can hold private discussions. Choose a location convenient to all the people who need to attend. When travel is a necessity, rent facilities near an airport. Sometimes the parties agree not to have a hearing at all, and ask the arbitrator to make a decision based solely on written statements or documents. In that case determine how you will obtain answers to any questions that may affect the decision. The most economical way is to plan conference calls with all parties. Exchange of information. The absence of the discovery process simplifies the arbitration. However, limited discovery may be appropriate if one or both parties need to share documents or information to prepare their case. In such instances, consider providing limited document production or interrogatories. It is extremely rare for this to lead to depositions, one of the more costly aspects of lawsuits. Exclusion of witnesses. Just as in lawsuits, arbitration witnesses may be excluded from sessions when they are not testifying to ensure they are not influenced by the statements of other witnesses. The parties will either agree to such exclusion or look to the arbitrator for a ruling. Court reporter. Transcription of the proceedings generally is limited to complicated arbitrations, though sometimes the parties request transcripts in simple matters. The arbitrator can deal with this issue by including the following paragraph in the scheduling agreement: There will be no transcript of the hearing unless requested by one of the parties. The requesting party is responsible for making the arrangements, advising the arbitrator and opposing party seven days prior to the hearing, and providing a copy of the transcript to the arbitrator. Testimony under oath. Given the informal nature of arbitration, having witnesses testify under oath seems unnecessary. However, if either party requests that the arbitrator administer oaths to witnesses, it is hard to think of any argument against it. In either case the arbitrator should freely ask any questions that might provide useful information. THE FINAL REPORT
The form of the arbitration report is an issue to be decided by the parties, with the arbitrator’s leadership. An oral conclusion is possible, but written arbitrator’s reports are the norm. I recommend the engagement letter include the statement, “Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.” In order to do that, a written report is required. The parties may agree on any form of report that suits their purposes. The arbitrator can help by determining whether the parties want a simple decision or need more information, such as the reasoning behind it. An expanded report might consist of a summary of the dispute, a description of the process, the issues, your evaluations and the conclusions. | | | Ensure that all parties to the arbitration know and follow the procedural rules. Protect yourself with an engagement letter and a scheduling agreement. Anticipate what you may need—private rooms for discussions, teleconferences and transcripts—in complex proceedings. Announce and publicize your entry into the field as broadly as possible. | |
AN OPPORTUNITY AWAITS
Serving as an arbitrator can be an excellent opportunity for CPAs. To get started, you will need to let the right people know you’re available. Network with lawyers involved in dispute resolution, who occasionally will have clients involved in arbitration. Or advertise your availability as an arbitrator in law publications or service reference books. CPAs have the reputation and the skills necessary to be an arbitrator. Armed with an understanding of the process, they will be able to provide the necessary leadership, conduct a thorough analysis and make well-reasoned
decisions. |
