Trends in ADR and the Role of Financial Experts

The U.S. District Court for the Western District of Pennsylvania implemented Local Rule 16.2 in 2007, which requires parties involved in nearly all civil actions to agree upon some form of Alternative Dispute Resolution (ADR) during the litigation process. During the 18-month pilot period that tested Local Rule 16.2, the court found that 51% of the cases that entered into ADR were resolved before the end of the pilot period.

Under Local Rule 16.2, the ADR processes available through the court include: mediation, early neutral evaluation,and arbitration. Outside of Local Rule 16.2, ADR includes expert determinations, negotiations, settlement conferences,conciliation, facilitation, fact-finding, collaborative law, mini-trials, and ombudsmen.

In part due to court-driven initiatives such as Local Rule 16.2, there is an increasing awareness and utilization of the multitude of advantages that ADR offers parties—particularly businesses engaged in commercial disputes—as an alternative to court litigation. The primary advantages that lead businesses to ADR are the reduced cost and time to resolve confidentiality, and forum neutrality (particularly in international agreements).

But perhaps the most unique feature of ADR relative to court litigation is the control of the process that it affords the parties. In short, the parties to the dispute control everything, including the questions that will be decided, the length and subjects of discovery, the rules of procedure, and the selection of the third-party neutrals, experts, and/or case evaluators. Rather than the case being led by a judge appointed by the forum (oftentimes based solely on availability and current case volumes) or decided by a jury selected from the general public, the parties to an ADR can choose neutral evaluator(s) with the requisite expertise in the subject matter at the core of the dispute.

The financial expert can play a key role in ADR. Experts are most frequently engaged to assist the arbitrator(s) in evaluating the technical financial, accounting, and valuation aspects of large commercial litigations. Additionally, a disputing party may find it beneficial to separately retain financial experts as part of the ADR process to better understand the strengths and weaknesses of its case or to obtain assistance in communicating complex financial, accounting, and valuation issues to an arbitrator.

Frequently dispute resolution clauses within commercial contracts require the neutral to be a Certified Public Accountant(CPA) or similar subject-matter expert. Post-merger and acquisition (M&A) price adjustment provisions are the most common dispute resolution clauses that require expert neutrals. The reason for this is that post-M&A price adjustments are often determined based on technical assessments of various components of the subject company’s financial statements, which are required to be in accordance with Generally Accepted Accounting Principles, a matter in which a CPA is the preferred candidate for resolving the dispute.

Early neutral evaluation and fact-finding are also types of ADR that are frequently handled by a neutral expert. In these cases, neutral evaluators and fact-finders do not decide the issues of the case. Instead, they are engaged to determine the facts, and to separate the disputed facts from those that are undisputed. These expert neutral evaluators and fact-finders frequently offer recommendations or opinions on certain issues. While such opinions are not binding, they do carry weight with the parties.

In mediation and arbitration, it can be sensible and also more cost-effective to engage neutrals with a substantial background and expertise in the subject matter of the dispute, particularly when parties appoint arbitrators to an arbitral tribunal. When the heart of the commercial dispute is financial in nature, one party may feel they can obtain an advantage by appointing a financial expert as the party-appointed arbitrator, because the financial expert will more fully grasp and better appreciate the party’s position. Likewise, these experts are often better able to articulate the party’s case to the rest of the tribunal during in camera deliberations.

With more ADR usage in complex commercial disputes, it is likely that financial expert involvement will increase, both in the traditional role as experts as well as non-traditional roles including mediator, arbitrator, and fact-finder. Over the past 30 years, Gleason & Associates representatives have served in all of these roles, which is a testament to our experience, expertise, and reputation as litigation financial experts in the litigation setting.

Sources:

United States District Court for the Western District of Pennsylvania, LCvR 16.2

U.S. District Court for the Western District of Pennsylvania brochure, “From Case Filed to Case Closed”