Introduction
In an arbitration, financial experts are often called upon to render an opinion before a trier of fact (i.e., the tribunal comprising an arbitrator or a panel of arbitrators) on matters demanding financial expertise. While arbitrators typically have legal expertise, they often need the assistance of independent experts to interpret technical issues on subjects of accounting, finance, valuation, etc. This article discusses the role of financial experts in an arbitration and the functioning of the expert witness team within the framework of the professional standards governing expert reports.
For professionals who are members of the Canadian Institute of Chartered Business Valuators (“CBV Institute”), expert witness reports are governed by the following practice standards promulgated by the CBV Institute:
- Practice Standard No. 310: Report Disclosure Standards and Recommendations;
- Practice Standard No. 320: Scope of Work Standards and Recommendations; and
- Practice Standard No. 330: File Documentation Standards and Recommendations
(Collectively the “Practice Standards”).
Other specialized professionals such as Chartered Financial Analysts (“CFAs”), Chartered Professional Accountants (“CPAs”), and Certified Fraud Examiners (“CFEs”) are governed by standards set by the respective governing bodies. For example, CFAs are bound by CFA Institute’s Standards of Practice Handbook.
In this article, we address the role and duties of a financial expert who is a member of the CBV Institute and is therefore bound by the Practice Standards. For the purposes of this article, the term “expert” refers to a CBV expert. We discuss the expert’s role through phases of an arbitration as they work with their team to gather and review information, design and prepare the damages framework and financial model, write reports, and prepare evidence to be presented at a hearing. Working with a seasoned financial expert helps young CBVs develop key technical and soft skills, which enable their progression towards becoming an expert witness in their own right.
Role of the Expert through phases of an Arbitration
1. Role of the Expert
While this article focuses on the expert’s role in an arbitration, the expert’s role in a litigation and duty to the trier of fact are fundamentally similar, with a few key differences. Notable distinctions between an arbitration and litigation are:
- In contrast to litigation, a hallmark of arbitration is the parties’ greater flexibility to determine the applicable procedure, including the schedule and how evidence is presented.[1]
- The parties may agree to an aggressive schedule to achieve faster results. In this case, a collaborative relationship among the expert, project team and counsel is especially critical.
- The parties may decide not to include a formal process to qualify experts (also known as “voir dire”) and agree that their respective experts may provide evidence, with any concerns about an expert’s qualifications or scope of expertise left to the tribunal’s weighing of the evidence.
- The parties may decide to have evidence-in-chief delivered through witness statements or affidavits (in the case of an expert, a brief statement attaching their report) with no oral evidence-in-chief, or only a brief direct examination, followed by cross-examination.
- In contrast to litigation, where judges are assigned with no input from the parties, in an arbitration, the parties select the trier(s) of fact. Arbitrators may be selected for a variety of reasons, including their experience deciding similar cases and/or their non-legal subject matter expertise (g., experience with financial or commercial matters). Experts may be asked to take an arbitrator’s level of experience into account in deciding how to present their conclusions, both in writing and orally.
Among other things, financial experts can be retained in an arbitration to opine on the value of shares, assets or an interest in a business; the quantum of financial gain/loss; or any other relevant conclusion of a financial nature.
In an arbitration, the conduct of the expert is driven by the specific rules governing the arbitration, which are usually selected by the parties as part of their arbitration agreement or decided by the arbitrator after hearing submissions from both parties. The rules selected may be institutional arbitration rules (e.g., ADR Institute of Canada (“ADRIC”) Rules, International Chamber of Commerce (“ICC”) Arbitration Rules and/or International Bar Association (“IBA”) Rules on the Taking of Evidence in International Arbitration). The parties may also elect to determine their own, ad hoc procedure.
An expert may be appointed by the tribunal or the parties in a dispute, but the expert’s primary and overriding duty is to the tribunal to assist them in deciding the issue/s in respect of which expert evidence is adduced. The expert is also required to maintain their independence and objectivity.[2]
Expert evidence could take the form of one or more written reports (i.e., an expert report followed by a rebuttal or reply expert report, if needed). Experts also provide oral testimony at the hearing, where they may be cross-examined on their findings.
The testifying expert is often supported by staff who assist them in various capacities. We discuss the role of the expert witness team in the following section.
2. Functioning of Expert Witness’ Team
Team Structure
Depending on the size, complexity and types of analyses required, the expert is often supported by a team through the course of the assignment. The general structure of the team is comprised of the testifying expert, project manager and associate(s).
The role of the team is informed by Standard 320 which sets out general and specific standards relating to the scope of work. Standard 320 requires the expert to:
- Assign an aptly qualified team to the project;
- Provide proper supervision to assistants (e., the project manager and associate(s)) employed; and
- Use professional judgement to determine the extent of evidence required to ensure that the expert report is properly supported.
While the project team assists the expert with document review, data analysis and drafting the report, the expert retains full responsibility for the contents of the expert report.[3]
Gathering and Reviewing Information
Experts assist counsel in identifying information and documents required for their analyses based on their preliminary review of the pleadings, agreements, and other case facts.
Standard 320 requires the expert to ensure that the report and the conclusions contained therein are properly supported by evidence, or else to qualify the conclusions set out in the report and clearly set out the scope limitations if all the information essential to the conclusions contained in the report is not provided for the expert’s review.[4]
Standard 330 illustrates the following categories of information that the expert must retain on file or have access to at the time of conducting the engagement: [5]
- Information that provides an understanding of the subject of the expert report such as pleadings, agreements, contracts, letters of understanding, letters of intent and other correspondence;
- Information relating to the nature of the dispute and the events leading to the claim;
- Information relating to the economic context/industry outlook; and
- Financial information such as financial statements, projections, tax returns.
Designing and Preparing the Damages Framework and Financial Model
Where the expert is asked to quantify damages, the project team conceptualizes a damages framework to underpin the analysis. A commonly used damages framework is a comparison of a counterfactual scenario (the “but for” scenario) with the actual scenario, wherein the difference between the two scenarios represents the damages claimed from the alleged wrongdoings.
A damages framework outlines the counterfactual scenario and the assumptions adopted. For example, if the expert witness team is quantifying the damages on account of a breach of a share purchase agreement by the buyer, the counterfactual scenario will likely be modeling the acquisition as if the transaction had been completed. In this example, the primary assumptions would include, among other things, the contemplated transaction date and the nature of the financial consequences associated with the completion of the transaction according to the terms of the agreement.
Standard 310 requires an expert to disclose all the assumptions along with the procedures followed to test the reasonableness of key assumptions in their report and set out the assumptions as follows:
- assumptions that the expert has been directed to take which are outside the scope of their expertise and are to be proven on their own merit in the arbitration (g., legal/factual positions);
- assumptions based on the expertise of other experts that are outside of the scope of the financial expert’s expertise (g., a specialized geology expert in a mining case);[6]
- assumptions that the expert is directed to take on matters within their expertise but for which they have not been provided with the opportunity to offer assurance (g., a scope limitation due to a document that was not provided to the expert for review); and
- assumptions made by the expert within their area of expertise and based on their scope of work (g., metal pricing forecasts in a mining case).
After establishing the damages framework, the project team, with the guidance of the expert, designs the financial model to present their calculations and conclusions.
A good damages model is generally:
- Easy to follow: The model is prepared for non-financial experts (g., arbitrator, opposing counsel) and therefore must be intuitive and easy to follow for a lay audience.
- Dynamic: Arbitration often requires presenting multiple permutations of the model. For example, the expert may be asked to consider how the model might change if certain assumptions were altered (g., if the tribunal makes certain factual determinations). Making frequent manual updates to the model increases the propensity of errors. This risk can be mitigated by using a dynamic model. Experts often incorporate a sensitivity and scenario analysis in their models which helps with assessing the impact of changing key economic and factual assumptions on the quantum of damages.
- Put through independent quality review: The model developed is subjected to quality and logic checks by way of an independent quality review.
Report Writing
The project team assists the expert with the preparation of the report and the schedules to accompany the report. The project team will consult with counsel throughout the drafting of the report to ensure it is clear, well-presented and effectively addresses all aspects of the expert’s mandate. Nonetheless, the expert and project team are responsible for all analyses and conclusions in the report.
Standard 310 sets out the following minimum requirements to be included in the expert report:
- Report introduction which includes information about the addressee, the party engaging the expert, the expert’s mandate, the date and purpose of the report and the name and firm of the expert preparing the report.
- Statements confirming the following aspects must be included in the report:
- the independence and objectivity of the expert;
- the expert’s compensation not being contingent on an action or event resulting from the use of the expert report; and,
- the report’s preparation in conformity with the Practice Standards.
- Other sections include key financial definitions, a detailed scope of review along with any scope limitations, and disclosures that would allow the reader to discern the process followed by the expert, including any foundational assumptions.
The report is the expert’s first formal contribution to the advancement of the case. The expert may have the opportunity to file a rebuttal report to the opposing expert’s report and in some cases, a reply to the opposing expert’s rebuttal of their first report. After a couple of rounds of exchanging reports, it is typical for the two experts to file a joint expert report to identify key differences in opinions, among other matters required to be addressed by a trier of fact. We do not delve into joint expert reports in this article.
Preparing to Present Evidence at the Hearing
The role of the expert and the project team in an arbitration hearing begins well before the scheduled arbitration date as the expert commences discussions with counsel regarding hearing preparation, the expert’s testimony (including the expert’s presentation at the hearing), as well as cross examination. The goal of preparation is to ensure the expert can effectively present their conclusions to the tribunal and is ready to respond to anticipated questions from opposing counsel or the tribunal. Counsel may also seek the expert’s support in preparing questions to cross-examine the opposing party’s expert.
Experts may be asked to explain their processes for gathering information, testing assumptions and developing the damages framework, including any strategic decisions. Experts may also be asked to consider alternative models and address how changes to their assumptions would affect their findings.
A key first step in hearing preparation is a thorough review of all expert reports filed by both sides, along with supporting appendices, exhibits, and documents. The expert may discuss the key assumptions and analyses in the report with the project team, as needed. During their review, the expert also identifies issues and areas that may require further clarification during the direct presentation or may be subject to cross-examination questions by the opposing counsel.
At the hearing, the expert typically provides direct evidence through a brief presentation to the tribunal[7] and possibly re-direct examination from the instructing counsel, cross-examination from opposing counsel and any questions from the arbitrator(s). The expert’s presentation in direct examination is often supported by an aide-memoire and/or visual aids (e.g., PowerPoint slides) to help summarize key elements of the expert report(s) including the damages framework, assumptions, analyses, conclusion, and areas of disagreements with the opposing expert. Creative presentation approaches that help bring the analysis to life can be powerful tools to ensure the expert’s analysis has the maximum impact on the tribunal. For example, a complex damages analysis could be made more digestible through the use of a multimedia aid that shows how certain variables impact total damages.
The direct presentation is followed by the expert’s cross-examination by opposing counsel which can focus on the expert’s experience and qualifications, the development of the damages theory, their assumptions and/or their underlying calculations. The expert may also be asked about the project team and their respective roles in preparing the expert report(s).
The good expert will generally:
- Confine their evidence to be responsive to questions raised;
- Speak slowly and clearly, explaining any technical terms they use;
- Agree to reasonable premises put to them;
- Nuance their responses appropriately, including by identifying and addressing any false or unreasonable unstated assumptions in questions put to them;
- Avoid the appearance of advocating for the party who appointed them, particularly during cross-examination; and
- Ground their oral testimony in their report(s), as appropriate.
Good preparation by the expert, with the support of the project team and counsel, is critical. However, it is also important to expect the unexpected. Hearings always involve an element of unpredictability. Experts may be posed questions they had not anticipated on cross-examination. Requests can also come from the trier of fact.
For example, in a recent arbitration, the trier of fact inquired about alternative calculations to assess potential damages. Although these questions were posed to counsel, the expert and project team provided key support in helping provide user-friendly tools to assist the arbitrator.
Counsel often request that the expert and project team to attend any examinations of the opposing party’s expert. Counsel will rely on the expert to help identify inconsistencies, unstated assumptions and/or methodological frailties that can be raised on cross-examination to challenge the other expert’s evidence.
While the expert’s substantial involvement in the arbitration generally ends with the hearing, in some cases, the expert, along with the project team, assist counsel in resolving any technical questions for the post-hearing briefs.
3. Conclusion
Financial expert evidence is a key component of the arbitration process, which assists the parties and tribunals in understanding the complex economic and financial issues that arise in disputes. Tribunals appreciate expert evidence that is clearly articulated, easy to follow, and well supported with verifiable evidence and independent industry research.
The process of submitting an expert report is a multi-stage and highly collaborative process, demanding myriad skills at each stage.
[1] See for example, Article 22 of the International Chamber of Commerce Arbitration Rules and Article 4.7 of the ADR Institute of Canada Rules, which provide that the arbitral tribunal must take account of any agreement between the parties when determining the appropriate procedure.
[2] Practice Standard 310, paragraph 6.1G.
[3] For example, per Article 8 of the CiArb guidelines, the expert is required to declare, among other things, that the opinion provided in the report represents their own, impartial and objective opinion. In litigation, civil procedure rules typically require experts to confirm that their evidence is objective and non-partisan (see e.g., the Ontario Rules of Civil Procedure at Rule 4.1). Although such requirements are not always explicit in arbitration rules or agreements, the same underlying principles apply.
[4] Practice Standard 320, paragraphs 4C and 4E.
[5] Practice Standard 330, paragraph 5D
[6] If the expert relies on the work of a specialist in reaching their damages opinion, the expert must document the conclusions and retain a copy of the written opinion or report of the specialist, if provided.
[7] Sometimes the expert’s report will stand as the examination-in-chief, in which case the expert will proceed directly to cross-examination by opposing counsel. However, where possible, it is helpful for the experts to provide the trier of fact with an oral overview of the report.
