Professor Grant Jones - Arbitration & Accountancy

Partnership disputes: arbitration tips.

I have had a substantial number of appointments as arbitrator in partnership break-ups. The purpose of this note is to provide tips for the parties ('the arbitrants') to a partnership dispute arbitration. The tips are provided in a spirit of wishing arbitrants well.

Background.

The vast majority of partnership break-ups governed by arbitration occur amongst the traditional professionals, accountants and lawyers. There are a number of reasons for this. Primarily it is because the professional bodies for lawyers and accountants offer arbitration services. Not every professional body offers such services. Secondly, arbitration suits the nature of the breakup; the arbitrants do not wish to 'wash their dirty linen in public'. This is especially the case for traditional professionals who wish to maintain their image within a local business community. Thirdly, standard partnership agreements often include an arbitration clause, so by a process of inertia, without thinking about it, the partners adopt an arbitration clause. I suspect a fourth reason, but this is a mere suspicion. I suspect if the partners to a proposed partnership deed think about the ADR clause at all, they think that they would prefer arbitration. This is because there would be no need to employ lawyers and the whole process will be cheaper than going to court; as Arbitrants they presume that given that arbitration has 'no bar on the rights of audience', they will in the event of a dispute, represent themselves. In the UK it is primarily only barristers that have a right of audience in front of the court. As can be seen I believe that this is a mere suspicion of a reason. In practice arbitrants, even though very capable, rarely take advantage of the opportunity that arbitration offers to represent themselves. Sadly I believe that arbitration does not always work out cheaper than court litigation. However the potential added expense of arbitration is I believe entirely down to the arbitrants behaviour during the arbitral process.

The majority of partnership disputes do not revolve around whether 'Partner A' should or should not have been (say) expelled from Partnership B. Rather it is accepted that Partner A had to leave Partnership B, but the dispute is as to the terms. The dispute is therefore primarily as the quantum. But it is not an entirely quantum-orientated issue. There will be issues of interpretation of the deed, legal issues which impact upon accounting issues. A classic example would be that of 'goodwill'. Should goodwill be shown on the partnership breakup accounts and if so how is it to be valued. Whether a leaving partner is entitled to a share of goodwill may well be primarily a matter of deed construction. The quantification of goodwill will be an accounting issue. Law and accountancy interact.

I offer the following tips to arbitrants in partnership breakup arbitrations: (1) the use of lawyers should be minimised or controlled and that of accountants maximised; (2) err towards documents-only arbitration; (3) watch costs continually; and (4) consider the rules of the arbitration carefully.

(1) The use of lawyers should be minimised or controlled and that of accountants maximised.

(I) What type of lawyers should be appointed? Choose lawyers that are familiar with the arbitral
process.

Lawyers tend to follow (I would go so far as to say slavishly follow) court process in an arbitration. Court litigation is expensive. By merely following court procedure, the arbitrants will dramatically increase the cost of the dispute resolution. They will have all of the typical costs of court litigation, together with the costs of the arbitrator. I for my own part try and use arbitration-orientated language in an attempt to remind the parties (i.e. the arbitrants) that they are not within a litigation process. The arbitrants own the arbitration procedure. They can dictate the nature of the proceedings. Whilst it is true to say that the arbitrator can within the rules dictate the procedure, it would be unbecoming to say the least, for the arbitrator to follow a procedure against the wishes of the Arbitrants. As can be seen from the various professional body arbitral rules, much discretion is given to the arbitrator and hence the arbitrants as to the procedure to be followed. If the arbitrants wish to follow court procedure and not some expedited process, the arbitrator is understandably likely to follow the wishes of the arbitrants. Such slavish following of court procedure is often because lawyers simply feel comfortable with the process that they are familiar with. Consequently if arbitrants are to appoint lawyers, they should choose lawyers familiar with the arbitral process. Or rather lawyers who are happy not to follow slavishly court process.

My tip: appoint lawyers familiar with arbitral proceedings.

(II) The use of friendly lawyers in partnership disputes.

I often wonder why lawyers representing arbitrants in partnership disputes unduly (in my view) inflate costs by taking every point. Solicitors and accountants (the normal bread-and-butter partnership dispute source) have many contacts with lawyers and exchange favours. Let us live in the real world. A firm of accountants will have relationships with solicitors. Solicitors will have relationships with barristers. In a partnership breakup those contacts are called upon. A departing accountant may say to a lawyer, "Look here I have given you lots of work in the past, if I set myself up on my own, you will continue to get work, but I really need to sort this issue out with my former partnership". In this case the accountant thinks he is onto a good thing. The lawyer knows that his commercial interest is best served by really working for his client accountant. The accountant thinks he is onto a good thing and will probably get a reduced price. Both sets of accountants (i.e. both arbitrants) will be thinking the same thing. Both sets of advocates will be thinking the same thing. Consequently the lawyers will take every point that they can. Costs increase. Because both arbitrants think they are onto a good thing, that does not mean that this is a win-win scenario. In the end one-party will usually have to pay both costs and that means paying the costs of the other side. Yes of course it is sensible to use friendly lawyers in any dispute, especially partnership disputes, but be wary: fighting every corner to impress a friend, does not necessarily advance your situation if you lose. If a friendly employed lawyer is utilised, he should be well managed. His function should be minimised.

My tip: if you are to consider appointing a lawyer advocate with whom you had a long-standing relationship, manage him.

(III) the use of lawyers in accounting disputes.

Taking the apocryphal 'goodwill question' posed above, why is it that, especially in accounting partnership disputes, the arbitrants in my experience defer to lawyers. In virtually every arbitration with which I have been involved involving the question of valuation of goodwill, I have felt that what was needed was an 'accountant advocate', not a lawyer advocate. It is not just the goodwill question, many disputes among partners involve the preparation of accounts. Advocate accountants are ably suited, particularly in a documents-only arbitration, to address the matters. The situation becomes even worse when lawyers start presenting accounting arguments. For not only do they not understand the accounting arguments, but in so doing they often forget the legal arguments. For instance if accounts have been prepared in a certain manner for some time, a question of estoppel may arise. The question of what constitutes legally an estoppel is often not fully addressed whereas the method of preparing the accounts is so addressed. It is not unusual in my experience in accountant partnership breakups for the accountants to leave the lawyers entirely to manage the arbitration. This is notwithstanding the fact that the issue in dispute may be entirely accountancy orientated.

My tip: use accountants in accounting disputes.

(IV) the use of barristers and cross-examining witnesses.

Barristers have specialist skills, of that there is no doubt. But are those specialist skills necessary in partnership disputes? Personally I feel that in the vast majority of partnership dispute arbitrations there is no necessity for cross-examination. The matter can be solved on a documents-only basis. Unfortunately feelings often run high in such disputes and one arbitrant may feel he wishes to have his day in court by cross-examining witnesses. My experience is such cross-examination only results in a 'his word against my word scenario'. Costs are especially increased as documents-only arbitrations can be quite cheap. Think carefully as to when to use a barrister, but especially to use a barrister for the purposes of cross-examination: is cross-examination really necessary?

(VI) the use of barristers generally and advocates in person.

Barristers are experts at presenting cases. Barristers may in fact be cheaper than solicitors. Consequently arbitrants may wish to appoint a barrister. This is notwithstanding my concerns noted above as to cross-examination.

If as accountants you wish to appoint a lawyer, remember that you have direct access and rather than appoint a solicitor you may wish to appoint a barrister directly. Indeed if the dispute is about accounts as well as law, as an accountant you can focus on the accountancy side, leaving the barrister to concentrate on the legal side and general presentation. Barrister accountant combinations work well.

If you are a solicitor in a partnership dispute, should you employ a lawyer to represent you and if so, what type of lawyer.

There is a common saying, 'a lawyer who has a client for himself, has a fool of a client'. In partnership disputes however I think that the usefulness of this saying can only go so far. The usefulness of the phrase very much depends upon the respective sizes of the arbitrants and the current wherewithal of the arbitrants.

I have been appointed an arbitrator in scenarios were, including costs, an arbitrant has faced personal bankruptcy upon losing. This is because, whilst he may have had the wherewithal to meet the judgement, he did not have the wherewithal to meet the costs. Arbitration is governed by the parties. If the parties agree to limit legal representation to (say) 'not appointing outside lawyers', then costs can be reduced. Both sides will be equally disadvantaged. Both sides will have a fool as a client.

If the arbitrants are of different sizes then the larger arbitrant may be able to self-employ without the disadvantages associated with self-employ lawyers. For instance if a 20 partner firm, expelled a partner and the remaining 19 partners took the single partner to arbitration, I really do not think that if one of the remaining 19 partners acted as an advocate in the arbitration, then the normal disadvantages associated with self-employ lawyers would hold true. Whether the problems associated with self-employ lawyers would apply to the single partner arbitrant is a matter for conjecture. On the whole I find the phrase, 'a lawyer who has himself as a client has a fool as a client', to be an exaggeration.

In solicitor disputes I occasionally find firms of solicitors employing another firm of solicitors who in turn instruct barristers. This I find perplexing. Costs are substantially increased.

Consequently, given that there are no rights of audience restrictions in arbitration, arbitrants should consider that they do not need to employ a barrister; indeed they could in certain circumstances sensibly employ themselves as advocates.

My tip: carefully consider the use of barristers and of acting as an advocate in person.

(2) err towards documents-only arbitration.

Arbitration can be and indeed should be cheaper than litigation. For many reasons, including those noted above, it often becomes more expensive. Arbitration need not follow court procedure. In one area I believe it should err in departing from court procedure: namely in the use of documents-only arbitration in partnership disputes. Partnership disputes are well-suited to documents-only arbitrations. Rarely as noted above is there a requirement to cross-examine. The arguments can be reduced to writing. If there is a need for an oral hearing it can be done by telephone.

My tip: err towards documents-only arbitration.

(3) watch costs continually.

Every arbitrant believes or professes to believe that they will win and consequently will have costs awarded. They are wrong 50% of the time. Given that a partnership dispute arbitration is about the arbitrants' livelihood and that consequent to the dispute at least one party, if not both, will have had their practice substantially affected, a double whammy often follows; losing on liability and on costs, and this often has very dramatic impact. It is a platitude to say watch costs continually. My advice is given because of the dramatic impact that arbitral awards often have on the losing party.

My tip: watch costs continually.

(4) consider the rules of the arbitration carefully.

The majority of partnership dispute arbitrations are held under the auspices of the relevant professional body and the scheme rules are noted below:

ICAEW arbitration scheme.

ACCA arbitration scheme.

Law Society arbitration scheme.

As can be seen the scheme rules are not particularly prescriptive. Arbitrants are therefore left considerably to their own devices and in the hands of the arbitrator. At the beginning of the arbitration there may be more goodwill between the arbitrants than after the initial pleadings. Consequently it is advisable for the arbitrants to consider at the outset and hopefully agree at the outset, parameters and rules of the arbitration. Most notably the arbitrants may wish to set in stone a timetable. A suggested timetable is contained within the ICAEW and ACCA rules; not so the Law Society.