Should accountants be appointed as arbitrators? This is especially the case given that "Arbitrations offer the parties engaged in a dispute some choice in the selection of arbitratorsi".
I would declare an interest right at the beginning. By way of qualification, I am a chartered accountant and a solicitor, as well as an arbitrator. By way of background, I have occupied and continued to occupy positions within the Institute of Chartered Accountants in England and Wales. Consequently I believe I have the best interests of accountants at heart and that includes their advancement within arbitration.
Let me set the scene -
"Even though there is a wide range of commercial cases and issues resolved through arbitration, it is striking how lawyers dominate these appointments, over other professionals or lay people with experience relevant to the case. As an accountant, I am interested in why this is so, even for cases where accounting, financial or commercial issues are central. It is customary for accountants to give expert evidence in arbitrations, but far less usual for them to act as an arbitrator. And yet a proper mastery of the accounting, financial and commercial aspects can be so important to the quality of the decisions reached in arbitrationsii".
Are accountant arbitrators up to it? Do they want to be up to it? Are accountant arbitrators wanted?
I concur with the quote in finding it odd that so many lawyers are appointed in disputes, where "accounting, financial or commercial issues are central". However, whilst Maggie's article concentrates on the benefits of the accountant arbitrator, I would also suggest that there are some downsides to appointing an accountant arbitrator. These downsides are discussed below; but can be minimised if the accounting arbitrator has legal expertise (I have declared my interest, I am also a lawyer) or substantial arbitration experience. I would also suggest that there exists a cosy relationship between lawyers and accountants. Accountants can do very well out of expert witness work. Work which is invariably introduced by lawyers and if lawyers take the arbitration appointments, why 'bite the hand that feeds'? Finally, arbitration is consensual, fundamentally laissez-faire and subject to the free market: litigation is not. If the parties to arbitration (the arbitrants) had wanted a large class of accountant arbitrators to emerge, market conditions would have brought on that emergence. The question needs to be asked, 'why has the market not forced a change in favour of the accountant arbitrator'?
The arguments for the accountant arbitrator considered.
"Clearly, most arbitrations involve disputed legal issues, requiring the expertise of a lawyer to resolve them. But in a panel of three or more arbitrators, does that mean that only lawyers should act? Unlike the courts, which can impose injunctions or specific performance, most arbitrations are restricted in the remedy available to them and can only award damages. Damages may, or may not rest, on the decision made in respect of the legal issues, [but they] are of no less importance: it is no consolation for a claimant to win on every head of claim, but receive the wrong recompense. The same applies for a respondent, in terms of what must be paid. If lawyers are the right choice to determine matters of law as arbitrators, does it follow that accountants are best to determine matters of quantum? I would argue yes, particularly as they are used to doing so in other dispute resolution forums.iii"
Maggie makes two main arguments for the accountant arbitrator.
Argument one: 'The accountant arbitrator as a member of a multi-arbitrator tribunal'.
As to the multi-arbitrator tribunal it is argued that at least one member of the tribunal should be (in relevant cases) an accountant arbitrator. Whilst I support this view I note its difficulties. Multi-arbitrator tribunals are expensive. They should only be used for the largest of cases, which tend to be international and legalistic, and consequently the special plea for the role of the accountant arbitrator is obviously limited. The use of (say) a three-man tribunal in international arbitrations, is often because two of the arbitrators will be seen to understand the culture and the law of the respective arbitrants. The remaining third arbitrator is seen as a neutral expert lawyer. Rarely in such large arbitrations, would the arbitrants not want to see the chairman of the tribunal as other than a qualified lawyer. Having said this, it is not unusual in large-scale international engineering contracts to have an engineer arbitrator member of the tribunal: but even here, rarely as the chair.
Argument two: 'It's the quantum that's the issue, not the liability and what the parties really want is a correct quantum decision'.
(4). There are no directions hearings during the whole arbitral process. I am in sole control of the arbitral process & 'deadlines' are not burdensome.
As to the real issue of arbitration, it is claimed that it is the quantum, not the liability; and accountants are good at quantum, whereas lawyers are good at liability. This view is stark. It is no good working out a perfectly correct award as to quantum, when liability itself was wrongly decided. The argument cuts both ways. Again, the argument seems to revolve around a multi-member arbitral tribunal. The lawyers can work out the liability and the accountants can work out the quantum. Is the choice between the growth of multi-member arbitral tribunals, with their concomitant costs, or of getting the liability wrong, but as it were getting the quantum right; if so, it is a choice between a rock and a hard place. For me, Maggie's argument argues in favour of the dual qualified lawyer cum accountant arbitrator (I already have declared my interest) or perhaps of bifurcation. In such a bifurcation, an initial award is made by a legal arbitrator as to liability and based upon that award, a further award is made by an accountant arbitrator as to quantum. Dual qualification and/or bifurcation adequately addresses the quote; "If lawyers are the right choice to determine matters of law as arbitrators, does it follow that accountants are best to determine matters of quantum?"
The accountant arbitrator comes into his own when the arbitrants have narrowed down the issues to an accounting issue. If the accountant arbitrator needs to address legal issues, then in my opinion, one of several sets of circumstances should exist. First, given my declared interest, the accountant arbitrator must also be qualified as a lawyer. Second, the accountant arbitrator is to sit in a multi-member arbitral tribunal with its added expense. Third, the accountant arbitrator is to appoint a legal assessor, or expert to so advise: again with its added expense. Fourth, the accountant arbitrator is exceptionally experienced and consequently has addressed legal issues many times. There are a number, a limited number, of such accountant arbitrators. However it is wrong to say that lawyers dominate arbitration appointments. Surveyor arbitrators constitute a huge cohort and rent review arbitrations constitute a huge group of UK arbitration appointments. Why have surveyor arbitrators been spectacularly successful as against accountant arbitrators. I would argue that the success is because the law rarely impacts upon rent review arbitrations and to the extent that the law does so impact, it is law well studied and understood by surveyors. Thus for accountant arbitrators, unlike surveyor arbitrators, "even for cases where accounting, financial or commercial issues are central", the law, especially 'exotic law', permeates. I believe that in arbitrations proper (unlike expert determinations) the accountant arbitrator can rarely really escape the law. The surveyor arbitrator can escape the law.
In justification of the accountant arbitrator: a comparison with expert determination.
In justification of the general contention that there should be more accountant arbitrators, it is noted that:
"...it is standard practice in the UK and other European countries, to use an accountant to resolve transaction and other disputes involving, for example, the determination of net assets, working capital or profits. Such disputes are resolved by the appointment of an independent accountant acting as expert determiner, not a lawyer or judge. An accountant acting in this role determines not only the outcome, but also manages the dispute resolution process which secures that outcome. That may include seeking counsel's view on issues of law, and incorporating that opinion into her determination. The same factors such as privacy, the need for a cost efficient, time sensitive and binding decision, which characterise arbitrations, apply to the expert determination process too. So if accountants have proved to play a successful role resolving disputes involving numbers, why is the same role seen so rarely for them in arbitrations, and what are the implications from their absence?iv".
I feel this justification fails in that it points to the very difficulties that the accountant arbitrator faces. The accountant succeeds in expert determination and not arbitration, because there are conceptual and practical differences between expert determination and arbitration. In reality these differences are blurred, but they nevertheless exist. Arbitration is quasi-judicial. The arbitrants adopt an adversarial approach and the arbitrator acts in a judicial capacity. Expert determination is more inquisitorial. The expert determiner (there is disagreement as to what the exact term should be for the expert who carries out the determination) investigates and concludes; this conclusion or determination is based upon his investigations and more importantly, his expertise. The arbitrator decides according to the cases presented. In reality the expert will listen to the respective submissions. But an arbitrator should never decide on his expertise alone, he should only use his expertise in deciding upon information and arguments presented to him. Again this distinction is blurred; the arbitrator may ask specific questions which elicit information and arguments presented to him. So, surely and at least superficially, this justification for the accountant arbitrator is merited? No, I would argue that it is not merited because of two practical considerations.
Practical consideration one: 'the law does not go away'.
As the quote points out, the expert determiner will have to, if needs be, obtain legal advice. So which is better, an accountant who obtains legal advice as an accountant arbitrator, or a lawyer that obtains accounting advice as a lawyer arbitrator? Both present difficulties, but the market evidently feels more comfortable with the lawyer arbitrator.
Practical consideration two: 'accountant expert determination is virtually always about accountancy'.
As a lawyer I have been involved in a number of expert determination appointments; but more especially in the drafting of a large number of expert determination clauses. Expert appointments are invariably made around expert issues and this is not the case for arbitration appointments. Many expert determination appointments can effectively be viewed as bifurcated arbitration appointments. The bifurcation separates accounting from legal issues. Arbitration appointments are general in nature; this is although the arbitrator may bifurcate the awards.
Expert determination clauses are often particularly difficult to draft. The clause itself is not difficult. It is the extent of the power of the expert determiner which causes the difficulties. The expert determination clause may say, 'the expert shall determine on (say) the calculation of lease payments in an aircraft lease': an example with which I have been involved. The rest of the contract may make reference to dispute resolution by way of arbitration, or to the sanction of the court. The question then becomes for the draughtsman to define, 'the extent of the calculation of lease payments dispute'; this is so that you do not have competing authority between the expert determiner, on the one hand and on the other hand, the arbitrator or the courts. In the lease calculation example, the calculation may well have a tax input which will affect companies. As one can see there is ample room for 'expert determination mission creep'. Consequently the expert determination clauses become so narrowly drafted, that invariably determinations very rarely involve matters of law. Thus in this example there is an effective bifurcation. The expert will decide on very narrow aspects of lease calculation and the arbitrator (if there is an arbitration clause) will decide on everything else.
This effective bifurcation is even more dramatically shown in ad hoc expert determination appointments. The lawyers who seek the appointment, draft the appointment documentation often so narrowly that invariably legal questions are excluded.
In short accountants make great expert determiners because just accountancy is usually involved. That, however is not a justification for accountant arbitrators. In arbitrations, the law is involved.
As a postscript, it is possible to argue that surveyor rent review arbitrations are de facto expert determinations. The growth of the surveyor rent review arbitrator could be based on the fact that experts know their place?
In justification of the accountant arbitrator: 'accounting errors'.
In justification of the general contention that there should be more accountant arbitrators, it is noted that:
"There are times when one party may think that an award contains an error with respect to quantum. Of course, just because an award contains a different number to an expert report does not necessarily mean it contains an error. Errors may not be straightforward to identify and may go unnoticed as a result. But when errors do occur, there are adverse implications, even for the party who "benefits". It has a de-stabilising effect which can affect confidence not only in the financial outcome, but also on the other key decisions made by the tribunal. The legacy for both parties can be some uncertainty as to whether the arbitration process was a safe place in which to allow an important commercial disagreement to be resolved. It may be that quantum errors are rare. But I suspect more creep into cases than is desirable, given the complexities associated with many contractual disputes and the existence of interrelated factors affecting quantum. These normally call for complex financial models, dealing with the combination of different matters of fact and assumption which the accounting expert uses to derive an opinion on quantum. But the arbitrators may need to get involved too. All too often the arbitration panel has to calculate its own numbers based on a liability decision which neither wholly adopts the claimant's position or the respondent's. This degree of complexity presents real risks of error. While I am not suggesting that an accountant is immune from making errors, quantum requires the exercise of a degree of skill and judgement with numbers, and sometimes spreadsheets. This is a skill which more accountants than lawyers possess.v"
There are two justifications contained within this quote and both are addressed below.
Justification one: 'the simple arithmetical error'.
It is correctly in my view claimed, that non-accountants are more prone to make simple arithmetical errors. But these simple errors are amenable to change via the slip rule. A provision exists therefore under the Arbitration Act 1996 to ameliorate the deficiencies of non-accountant arbitrators. There is a danger of 'throwing the baby out with the bath water', in suggesting that, because simple arithmetical errors may occur, which can in any event be rectified, we should forget the legal basis of arbitration and promote non-lawyer arbitrators.
Justification two: 'the complex arithmetical error'.
This justification is by far the most important and also the most problematic. It is explained that an arbitrator will have to make a decision, which often does not accept in its entirety the submissions of each arbitrant. Two scenarios apply. In the first scenario, the arbitrator may accept the financial model put forward by an arbitrant, but not accept all of the underlying assumptions. In this scenario the award ends up tweaking the generally accepted financial model. So for example in a complex financial model, which says that sales will be growing at (say) 20% per annum, the arbitrator will substitute (say) 10% per annum. The arbitrator in this case is using a financial model provided by an arbitrant and changing it slightly. A mistake in this regard should really be corrected by the slip rule. In the second scenario, the arbitrator will not tweak a financial model offered by any arbitrant. Rather he will create a new model upon which to base his award. A mistake here cannot be corrected by the slip rule.
It is assumed that the arbitrator will have asked questions and in both scenarios will have asked the arbitrants to have commented on, 'what if scenarios', being the first and second scenarios noted above. In the first scenario a simple mistake may have occurred and this to my mind, as noted above, is covered by the slip rule. It is the second scenario which causes me difficulties. The beauty of an accountant arbitrator is that he could play with the various models and create his own model. His own model will more correctly (we hope) reflect the true quantum situation. However should an arbitrator present a fate accompli to the arbitrants: whereby the arbitrator says, 'here is my worked out model', without having gone through a series of questions and 'what if analysis' with the arbitrants. It is in the very nature of the arbitration (as opposed to the expert determination) process for the arbitrator to involve the arbitrants in this decision-making process. Failure to involve the arbitrants makes the process look like expert determination. If the arbitrator: (a) involves the arbitrants in his decision-making process and if the arbitrants do not voice their concerns during the arbitration process and (b) if the model is consequently 'wrong' then, 'is it not the fault of the arbitrants advocates'? Perhaps the solution is to have accountant advocates, not accountant arbitrators? For me the problem is not a mistake in the model, whether it is a conceptual or arithmetical mistake. It is the fact that the non-accountant arbitrator could not have come up with an alternative financial model, regardless of whether the alternative financial model was arithmetically flawed. For that reason arbitrants should consider appointing an accountant arbitrator.
In justification of the accountant arbitrator: 'quality control'.
"It is not just about the calculation of the final numbers either. Using an accountant in the capacity of an arbitrator should improve the quality of evidence exposed during the hearing. For example, an accountant arbitrator can ask questions which more skilfully probe the expert accountant's report or the answers given by expert accountants during cross examination or "hot tub" questioning. Accountants are also more able to challenge the deficiencies or omissions in accounting record disclosure by the parties and the effect this has on the reliability of the evidence presented. When compared to a lawyer, they are likely to have a stronger understanding of the commercial context in which the quantum is to be decided.viii"
I need to ask a question re this quote. If we have an accountant arbitrator, surely 'we should be doing away with expert accounting opinion'? Notwithstanding this minor concern, I wholeheartedly endorse this quoted view. I often sit in quiet amazement at the paucity of expert opinion cross-examination. The cross-examination seems to revolve around 'rubbishing the expert' and not 'rubbishing the contents of the expert report'. The accountant arbitrator is superbly placed to manage the quality control of accounting input into the arbitration process.
"In short, I suggest that, in respect of accounting and financial issues, an accountant is less likely to have the wool pulled over her eyes than a lawyer. An accountant is also less likely to make calculation errors in the quantum of damages in the award. Overall, appointing more accountants as arbitrators must be a good thing for the quality of the decisions made from this important alternative dispute resolution forum. "
I agree with the above quote. However I believe it does not provide the full picture. There are inherent problems in appointing an accountant arbitrator who is not sufficiently skilled in the law. Further, there must be reasons why the market has not fully accepted the growth of the accountant arbitrator. I believe that the accountant arbitrator is a valuable addition to the arbitration community. But the nature of the work provided to the accountant arbitrator means that they must have a modicum of legal knowledge. This does not mean that the accountant arbitrator needs to be dual qualified, as an accountant lawyer. What it does mean is that the accountant arbitrator should have had a first degree in law, or alternatively be very experienced in arbitration and consequently in the law. Accountant ADR practitioners are perhaps better suited to expert determination and mediation. Rightly or wrongly, lawyers will remain a dominant force in taking arbitration appointments.
iIn this article I quote liberally from an internet article from the New Law Journal by Maggie Stillwell, a partner at Ernst & Young, who asks the question "where are all the accountants" who should be appointed as arbitrators?
viArbitration Act 1996 section 57.
viiArbitration Act 1996 section 57.
ixAs noted, I have quoted liberally from an article by Maggie Stillwell and as can be seen, I agree with her general thesis. More details of Maggie can be found at http://www.linkedin.com/profile/view?id=80967466&authType=name&authToken=8hpH
Terminological musings: the day an ADR virgin was criticised by his opponent, for misdescribing me as 'the arbiter', when it should have been, as everyone knows, 'the arbitrator'.
The ADR community is a diverse community. As such I would expect a linguistic divergence among practitioners. Let me say at the outset I am not a closet member of the Apostrophe Society. I am a grammar liberal. Whilst I may disparage conversational ‘textese’, I have no problem with the language evolving. But I remain surprised at both the level of linguistic divergence among the ADR community and at times, the strength of feeling caused by such linguistic diversity. I offer by way of example the day an ADR virgin was criticised by his opponent, for misdescribing me as 'the arbiter': -
So is it Arbiter or Arbitrator? What is the difference between an arbiter and an arbitrator?
It is fair to say that I have never heard until recently, a fully fledged member of the ADR community refer to arbiter; the term arbitrator is always used by such professionals. However I have now heard an ADR virgin (a.k.a. a party to an arbitration, or in this case ‘an arbitrant in person) refer to me, not as the arbitrator, but as the arbiter. In this case the ADR virgin was not legally represented, but the other side were, and their lawyer took it upon himself to correct the ADR virgin. For me, the alleged misdescription was neither ‘here, nor there’. I welcome ‘in person representation’. But who could blame the lawyer? Of course the term is he said, arbitrator? But who could blame the ADR virgin and his use of the term arbiter? We are all familiar with such phrases as ‘so-and-so is the arbiter of fashion’. So what is, if any, the difference between an arbiter and an arbitrator? More especially was the exampled ADR virgin technically incorrect in calling me, the arbiter?
The starting point for any analysis are dictionaries. They are only a little helpful. All provide similar definitions for both terms; but tend unfortunately to provide the same or very similar definitions for both arbiter and arbitrator.
Starting with some not immediately useful dictionary corners. The American Heritage dictionary of the English language defines arbiter as: "(1) One chosen or appointed to judge or to decide a disputed issue; [and most unhelpfully] an arbitrator. (2) one who has the power to judge or ordain at will, [i.e.] an arbiter of fashion". Along similar lines, the Collins English dictionary defines arbiter as: "(1) [most unhelpfully] (Law) a person empowered to judge in a dispute; referee; arbitrator. (2) a person having complete control of something". The Cambridge University press dictionary defines arbiter as: "someone who makes a judgement or solves an argument or decides what shall be done": which seems to cover all types of ADR appointment, from arbitrator to mediator to potentially, even an expert? Was the reference to me as ‘the arbiter’, a suggestion for ‘med-arb’?
Dictionary.com defines an arbiter as: "(1) a person empowered to decide matters at issue; judge; umpire. (2) a person who has the sole or absolute power of judging or determining". This arbiter definition throws up two further grammatical googlies. First, what exactly is an umpire and how if at all does it differ from an expert determiner (or is that expert determinor or determinator). Second and perhaps related, what is ‘determining’ and how does it differ from ‘judging’? To set things in context, Dictionary.com offers an example: "There was no shortage of such socially knowing, good natured and adaptable folk among the charter members of the Institute... who were not really... practitioners but ... well-settled arbiters of taste". Sadly this extract was not referring to members of the Chartered Institute of Arbitrators, but rather to John Updike in a ‘Century of Arts and Letters’, and was referring to a literary establishment. But an arbiter also appears to have from these definitions, "absolute power". Obviously an arbitrator's power, in normal parlance, stem from the contract and he is bound by the rules of natural justice. Duly circumscribed, an arbitrator, may not have "absolute power". Perhaps the ADR virgin was giving more than my entitled power; no wonder the lawyer intervened?
Dictionary.com further defines arbitrator as: "a person chosen to decide the dispute or settle differences, especially one formerly empowered to examine the facts and decide the issue". Again this definition is set in context with a quote. This time from Thomas Hobbes: "And therefore, as when there is a controversy in an account, the parties must by their own accord, set up for right Reason, the Reason of some Arbitrator, or Judge, to whose sentence, they will both stand, or their controversy must either come to blows, or be undecided, for want of a right Reason constituted by Nature; so is it also in all debates of what kind soever". Both the definition and the quote point to a possible nuanced difference between the terms. An arbitrator is formally appointed , whereas an arbiter is self-appointed. Again perhaps the lawyer was correct to intervene?
Dictionary-based nuanced extrapolation however overlooks facts. Even statutes, arbitration statutes refer to arbiters. The recently repealed Arbitration (Scotland) Act 1894 read: "Should one of the parties to an agreement to refer to a single arbiter refuse to concur in the nomination of such arbiter, and should no provision had been made for carrying out the reference in that event, or should such provision have failed, an arbiter may be appointed by the court [section 2]".
So we have a UK, albeit archaic, statutory definition of an arbiter as a Scottish arbitrator. Neither arbitrant in the instant case were Scottish.
As to the lawyers intervention in this case, I noted to the ADR virgin, that however I was described, it was of little importance to the substance of his case. Arbitration was not litigation I noted and I would not get hung up, as perhaps would a judge, on the correct address to use to the arbitrator, or should that be, the arbiter?