September 01, 2011

Introduction

The use of arbitration for commercial disputes continues to be a topic debated amongst corporate counsel and litigators. A recent study conducted by the Rand Institute for Civil Justice had the following key findings:1

A majority of respondents believe that contractual arbitration is better, faster, and cheaper than litigation, with most claiming it is “somewhat” so.

A large majority (71 percent) perceive professional arbitrators as tending to split awards, regardless of the merits of the case, rather than ruling strongly in favor of one party.

A majority believe that in addition to time and cost savings, four factors encourage the use of arbitration:

  • Avoiding exposure to potentially uncertain or emotionally driven jury awards
  • Control over the arbitrator’s qualifications
  • Confidentiality of proceedings and decisions
  • Complexity of cases and/or contracts

Further, the Rand study found that a majority of respondents considered that arbitration was strongly discouraged by only one factor – the right of appeal.2

While arbitration has its advantages, many still consider one disadvantage to pertain to the awards found by the arbitrators. Despite certain evidence to the contrary, a majority of respondents to the Rand study still believe the norm amongst arbitrators is to “split the baby.” Further, the study notes, “Our findings suggest that there is widespread belief that arbitration leads to compromised awards.”3

Consequently, the topic of the presentation of damages in complex commercial disputes continues to be of significant interest and development. This article discusses certain of the trends in the presentation of damages in arbitration. In addition, the article presents a brief discussion on how Delaware is providing an interesting example of how to use arbitration as a fast-track venue for corporate litigation.4

Laying the Foundation

The issue of damages becomes critical early in the case development. In a recent article for the National Academy of Distinguished Neutrals, John Sherrill, Esq., noted: “At the preliminary conference, the arbitrators should describe for the parties their general philosophy that will be followed for administering the case to keep it moving smoothly toward a final resolution. Also, normally discussed at this conference are summaries by counsel of claims, damages and defenses, the scope of the discovery to be engaged in by the parties (depositions, interrogatories, document production, etc.), and special problems or legal issues that counsel feel will be present in the dispute.”5

Arbitrators are increasingly seeking a more in-depth assessment of damages claims early in the case. Experienced arbitrators understand that in order to move forward with reasonable discovery, one must understand what the parties are arguing. In a complex commercial dispute, the claimed damages can be a critical component to those arguments. As such, arbitrators are increasingly adopting a proactive approach to understanding damages such that the process can be more effectively managed. This also provides the arbitrator with the opportunity to understand how the case is developing with respect to damages as the facts become evident, rather than waiting until the hearing to learn of the experts’ thoughts and findings.

A Working Group of the Conflict Prevention & Resolution Institute has been studying how damages are determined in arbitration. The group recently produced a “Protocol on Determination of Damages in Arbitration.” In this report, “it prescribes that arbitrators address, in or about their initial conference with the parties, the subject of damages, having the parties articulate their theories of compensation and their defenses, including mitigation of damages. Addressing these matters early in the proceeding, instead of leaving them in the background for presentation at later stages, enables the arbitrators to have a greater understanding of the relevance of evidence presented to them and may enable both parties and arbitrators to understand better the legal and factual aspects of the dispute.”6

The advantage for the arbitrator is that he or she will have an understanding of both the damages claims (amounts) as well as the inputs and assumptions that will need to go into those calculations. This provides a foundation for the arbitrator to more effectively manage the proceeding, limit or expand discovery, and understand the impact / relevance of certain fact findings on the calculation of damages.

Reconciling the Experts

Oftentimes in commercial disputes, the experts are calculating damages utilizing different frameworks or different expectations regarding the potential findings of the arbitrator. At the hearing, this may leave irreconcilable differences between the opinions of one expert and another. Alternatively, one expert may simply address concerns in the assumptions and conclusions of another expert, but not offer any independently developed opinion. Another trend being considered by arbitrators is having the experts work more collaboratively.

Arbitrators certainly recognize that each party may want to have their expert consider the facts independent of another expert, but it can be helpful for the arbitrator to understand where the similarities exist between the experts and where the differences truly exist. One way to accomplish this is to have the experts participate in some form of joint presentation. This may be prior to the hearing or it may be during the hearing.

In a 2007 article published in the Dispute Resolution Journal, George Ruttinger and Joe Meadows of Crowell & Moring LLP discussed the possibility of having the experts testify in each other’s presence. “All counsel can agree to have both sides’ experts present testimony at the same time. In this scenario, “dueling” experts may question each other, giving the arbitrators real-time insight into the competing views on the most contested issues. This format can benefit the side that has the stronger expert witnesses.”7

Additionally, John Sherrill’s article for the National Academy of Distinguished Neutrals notes several similar trends among arbitrators learning about the damages models of the experts:8

The presentation of direct testimony of witnesses in writing, with the witness being subject only to live
cross-examination.

Using “panels” of witnesses from each side to simultaneously testify regarding broad issues, rather
than putting each witness on the stand separately.

Direct confrontations between opposing experts, with each expert given the opportunity to question the opposing expert, and allowing the arbitrators to ask questions as appropriate.

Bifurcation of the proceedings to hear only the portion of the case dealing with liability before accepting any evidence concerning damages. Of course, a preliminary finding of no liability would obviate the need for any evidence of damages, sometimes saving significant hearing time. However, this procedure would only be more efficient if the proof of damages can be completely separated from evidence concerning liability, which is often not the case.

These recommendations echo many of the significant issues identified in the report of the Conflict Prevention & Resolution Institute.

Arbitrators are also increasingly asking proactive questions to more completely understand damages calculations. Ruttinger and Meadows note: “Counsel who has confidence in the expert may invite the arbitrators to question the expert directly on controversial matters before the other side’s cross-examination. Having arbitrators question the expert witness at this time may lessen the impact of a skillful cross and provide valuable insight into the direction the arbitrators are leaning. In addition, it provides counsel with an opportunity to make midcourse corrections if needed.”9 As discussed below, this also provides the arbitrators with the opportunity to make more informed decisions regarding the damages pursuant to their factual findings.

The Presentation of Damages

While arbitrators may request detailed reports and schedules be submitted by the experts, they are increasingly aware that the complexity of a damages calculation is often not clearly understood from simply reading the expert report. While the expert may have fulfilled their obligation to fully disclose the methods used and the basis for their calculations, it can often be difficult to completely describe how each factor of such a calculation relates to other factors. That is, even experienced commercial arbitrators will likely be unable to recreate an expert’s damages model to understand its inner workings.

The Protocol developed by the Conflict Prevention & Resolution Institute “sets out prescriptions for the presentation by experts of their damage calculations, requiring that they make their presentations in a way that permits the arbitrators to understand not only the results, but also the methodology by which the experts reached their conclusions and how different assumptions may alter the calculations.”10

Often, arbitrators are in need of a more complete and detailed explanation of how the damages calculations are constructed. In particular, arbitrators may ultimately find in favor of certain facts that do not perfectly match the damages framework for either expert. However, without an intimate understanding of the damages framework, the arbitrator may not be able to modify the calculations of the experts to determine an award that is congruent with their factual findings.

New Delaware Arbitration Rules

The Delaware Court of Chancery recently adopted new arbitration rules. These rules provide for a new alternative for resolving significant business disputes. Of particular interest to the presentation of damages are the following significant provisions:

Speed to Resolution – The rules specify that a preliminary conference must be held within 10 days of the petition being filed to address procedural matters and to schedule a hearing. A hearing is required to be scheduled within 90 days of filing the petition (unless otherwise agreed to by the parties).11

Court of Chancery Arbitrator – The arbitrator hearing the case will be a permanent member of the Court of Chancery, internationally recognized and respected for its expertise and experience in handling complex commercial disputes.12

Additional provisions provide for the confidentiality of the proceedings, cost-effective fee structure, and significant flexibility afforded to the parties to tailor the scope of the proceedings.

These new arbitration rules in Delaware may significantly alter the presentation of damages in these cases. With the case heading to a final hearing with 90 days, the experts’ work will likely commence soon after the scheduling order is finalized, if not before. This may also impact whether expert depositions are taken and, if so, when. In addition, these rules may further the trend described above regarding the depth of detail provided to the arbitrators. With arbitrators possessing significant experience in commercial litigation, it may be easier for experts to expound on the constructs of their damages calculations. It may also be easier for arbitrators to discuss with the experts the inner workings of the
expert analysis.

Conclusion

While arbitration continues to offer an alternative to costly and public litigation, it is still a unique venue that is continuing to develop. Recent studies and surveys suggest that parties to an arbitration, as well as the arbitrators themselves, are increasingly interested in establishing a more complete understanding of the economic damages at issue. To achieve this many are utilizing experts early in the arbitration hearings to assist the parties in understanding how the facts of the dispute could give rise to damages. As the case progresses, experts are increasingly being asked to participate in greater dialogue with other experts and with the arbitrator to establish the framework for damages and the information that supports the calculations.

As arbitration continues to develop and evolve as a means of dispute resolution, it is possible that experts will have an increasing role, not as an advocate but simply to explain and demonstrate how a business has been impacted by certain actions. The financial and economic expertise of the expert offers an often-needed compliment to the legal expertise of the lawyers as well as the business acumen of the parties involved.

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1 Business-to-Business Arbitration in the United States – Perceptions of Corporate Counsel, Shontz, Kipperman, Soma, Rand Institute for Civil Justice, 2011
2 Business-to-Business Arbitration in the United States – Perceptions of Corporate Counsel, Shontz, Kipperman, Soma, Rand Institute for Civil Justice, 2011
3 Business-to-Business Arbitration in the United States – Perceptions of Corporate Counsel, Shontz, Kipperman, Soma, Rand Institute for Civil Justice, 2011
4 Squire Sanders, Corporate Alert, May 2011, “Delaware Adopts New Arbitration Rules for Significant Business Disputes”
5 National Academy of Distinguished Neutrals, Member Article, John Sherrill, “Effectively Managing a Complex Commercial Arbitration,” May 2010 – http://www.nadn.org/articles/SherrillJohn-EffectivelyManagingAComplexCommercialArbitration(May2010).pdf
6 http://businessconflictmanagement.com/blog/2011/03/new-protocol-on-damages-in-arbitration/
7 http://www.crowell.com/documents/Using-Experts-in-Arbitration_Dispute-Resolution-Journal_Ruttinger-Meadows.pdf
8 National Academy of Distinguished Neutrals, Member Article, John Sherrill, “Effectively Managing a Complex Commercial Arbitration,” May 2010 – http://www.nadn.org/articles/SherrillJohn-EffectivelyManagingAComplexCommercialArbitration(May2010).pdf
9 http://www.crowell.com/documents/Using-Experts-in-Arbitration_Dispute-Resolution-Journal_Ruttinger-Meadows.pdf
10 http://businessconflictmanagement.com/blog/2011/03/new-protocol-on-damages-in-arbitration/
11 Squire Sanders, Corporate Alert, May 2011, “Delaware Adopts New Arbitration Rules for Significant Business Disputes”
12 Squire Sanders, Corporate Alert, May 2011, “Delaware Adopts New Arbitration Rules for Significant Business Disputes”

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