Many businesses, including accounting firms, have increased their use of alternative dispute resolution (ADR) – mediation and/or arbitration – as a means to reduce cost and time involved in dispute resolution. These firms' client agreements (engagement letters) require ADR to settle any controversy or claim arising out of their services, generally incorporating administration by the American Arbitration Association (AAA) under its rules specifically designed to address some of the unique characteristics of accounting disputes. Yet, many accounting firms complain that arbitrating a dispute takes too long, costs too much, and is encumbered by inefficiencies.
To address these and other issues, the AAA recently updated and rename its relevant rules, "Accounting and Related Services Arbitration Rules and Mediation Procedures." 1, 2 (the New Rules). Accounting firms and their advisors should note the many chnages, some of which may require revisions to the arbitration clause in engagement letters.
Striving for a more streamlined, cost-effective, and efficiently managed arbitration process, the New Rules address issues related to the exchange of information, including e-discovery; mechanisms to encourage efficiency; and changes consistent with the AAA's amended Commercial Rules effective October 1, 2013.3
Consistent with the revised Commercial Rules, the New Rules encourage mediation. While any party may unilaterally opt out, Rule A-5 requires mediation "in all cases" for claims or counterclaims exceeding $75,000. The mediation should take place concurrently with the arbitration and not serve to delay the arbitration proceedings. Absent any other agreement, the AAA's Commercial Mediation Procedure applies. Although the New Rules encourage mediation, accounting firms may want to incorporate a provision in their engagement letters requiring mediation and specifying procedures.
Many of the rule changes focus on the effective management of the arbitration process. A significant change requires a preliminary hearing, "as promptly as practical after the selection of the arbitrator." (Rule A-25). This requirement is stronger than the 2009 Rules and the revised Commercial Rules, both of which leave the decision to hold a preliminary hearing at the discretion of the arbitrator. The New Rules also provide guidance on and a detailed checklist of issues to be considered at the hearing in Sections P-1 and P-2. Resolving the issues described in these sections would go a long way to enabling "the parties and the arbitrator [to] organize the proceeding in a manner that will maximize efficiency and economy, and will provide each party a fair opportunity to present its case." (P-1.a). The guidance cautions the parties to avoid wholesale adoption of court systems procedures.
The checklist provided in P-2 is comprehensive, addressing initial issues such as the completeness of parties and claims, prehearing discovery, hearing procedures, posthearing submissions, and costs, among other issues.4 If all parties, including the arbitrator, participate in good faith in resolving these issues as early possible, the arbitration will be more efficient and cost effective.
Managing the discovery process is crucial to making arbitration more efficient than court proceedings. Unlike the 2009 Rules, which included virtually no discovery guidance, Sections D-1 through D-11 of the New Rules encourage efficiency by delineating the limits of discovery; they comprehensively address "Disclosure and Production of Information." The New Rules exhort the arbitrator to manage the process "with due consideration for proportionality both as to the scope of any request for information in relation to the likely relevance and materiality of the information sought and the amount at stake in the arbitration." At the same time, the arbitrator and the parties should "balance the goals of avoiding surprise, promoting equality of treatment, and safeguarding each party's opportunity to fairly present its claims and defenses." (D-1).
The New Rules limit document requests to files that are directly relevant and material to the parties' claims and defenses. Applications for discovery must contain descriptions of specific documents, classes of documents, or discrete sections of documents, along with explanations of relevance and materiality. (D-4.a). The arbitrator may direct a party to produce an index of accounting records or auditors' working papers to facilitate the required focused description. (D-4.b.). Requests for files of individuals should be limited to "those who spent time of significance (not measured alone by the number of hours spent) working on matters relevant and material to the parties' claims and defenses." "Blanket requests for drafts of documents should be denied." (D-4.c). Detailed guidance is provided on the production of "Electronically Stored Information (ESI)," including categories such as deleted data on hard drives and metadata that should not be allowed unless a compelling need is demonstrated. (D-5).
Other sections address depositions (limited to three per party, absent agreement of the parties or good cause), experts (direct testimony by written report, absent agreement or good cause), interrogatories (not to be employed, absent a showing they will significantly narrow the issues or permit necessary clarification) and costs and compliance (D-7, D-8, D-9, D-11), among other issues.
Of course, agreement by the parties will govern if they choose different discovery procedures. Given the changes and specificity of the New Rules, accounting firms and their advisors would be wise to review these conditions and consider whether different or additional discovery provisions should be included in their arbitration clauses.
Number of Arbitrators
Absent agreement of the parties, the 2009 Rules defaulted to having three arbitrators (except under Expedited Procedures, which assumed one arbitrator). . The New Rules predispose to a single arbitrator, absent a provision specifying otherwise in the arbitration agreement or the direction of the AAA. (A-15). Given this change, accounting firms and their advisors should consider whether a change in engagement letters is necessary.
The new Accounting and Related Services Arbitration Rules are more detailed and comprehensive; they will change the way arbitration of accounting disputes is conducted. The goal is for the arbitration process to be more streamlined, cost-effective, and efficient. Given the number of changes, only some of which have been addressed in this summary, accounting firms and their advisors should review the New Rules and align their engagement letter ADR provisions accordingly.
This alert provides an overview of some of the parameters to consider. To learn more, contact Sally Hoffman, senior advisor, Berdon LLP Litigation, Valuation & Dispute Resolution Services, and member of AAA Panel of Neutrals, at 212.331.7524 | shoffman@BERDONLLP.com.
1 Accounting and Related Services Arbitration Rules and Mediation Procedures
2 The previous rules, amended and effective June 1, 2009, were called, "Professional Accounting and Related Services Dispute Resolution." ("2009 Rules).
3 Commercial Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Commercial Disputes)
4 The checklist is virtually identical to the checklist included in the revised Commercial Rules.