Arbitrator: “Mr. John, what is an equity beta? What is the impact of levering and unlevering a beta? How is country risk premium impacting the weighted average cost of capital (WACC) that you have applied for discounting of cash flows?”Questions such as these and more can possibly trigger an adrenaline rush for some attorneys. However, these could also indicate the importance of referring a case to a technical and financial expert, in a specific business context.
The last decade has seen a significant rise in the number and intricacies around commercial disputes. As global enterprises increasingly aim at grabbing a piece of this pie in emerging markets; business models, commercial transactions and contracts tend to become more complex. Cut throat competition, potential for financial gain and ambition could also lead to potential differences between stakeholders. These factors have made commercial disputes even bigger and sometimes even difficult.
According to EY’s survey, ‘Emerging trends in arbitration in India’, a majority of commercial agreements or contracts contain an arbitration clause to enable efficient resolution of disputes, if any arising in due course of business. As a result, tribunals, lawyers and parties to the contract are gradually taking assistance from relevant financial and technical experts as part of arbitral proceedings.
Trend shows that arbitration as a mode of dispute resolution has been considerable growth in across sectors including oil & gas, telecommunication, shipping, maritime, energy and natural resources. Here, the propensity in infrastructure, construction and oil & gas remains higher due to the nature of these businesses.
The need for legal counsels to design a proper arbitration strategy that is efficient, practical and helpful to the claimant is critical. Involvement of an expert at an early stage of arbitration, i.e. before submission of stage of claim or counter-claim, can help the counsel and the claimant get inputs on possible outcomes of an arbitration through financial modelling. The financial parameters that can be evaluated under different business situations would include, loss of profit if the capital expenditure was deferred by five years, or if the funding was done through international financial instruments rather than issuing debentures. It could also be around the impact on the company if another joint venture partner was introduced at some point, after termination of the existing contract.
A financial model will also help incorporating variations in possible forecast parameters such as prices, foreign exchange impact, revenue and input costs, leading to different possible scenarios in case of loss of profit. It has been observed that an arbitration tribunal tends to be more comfortable with the evidence submitted by an independent expert on the subject, who can substantiate these through various industry reports, analysis and point of view. Experts’ reports are gradually becoming a norm in arbitration, especially in complex cases as they are seen as independent, professional and unbiased.
The evidence, being an essential element, plays a vital role in the commercial arbitration proceedings. Evidence can be oral as well as written, and both can equally contribute to the outcome of a dispute. More and more countries including India are introducing and updating laws to strengthen the arbitration process and making it time bound. Regulations such as these would lead to reduced cost of arbitration and make it more effective. In such time bound proceedings, the role of an expert becomes pivotal to avoid ambiguities and unscientific quantification, making the overall process more efficient.
Due to the magnitude and intricacy of disputes, there is a huge amount of documentation required that is submitted to the tribunal. With use of technology, the evidence, supporting documents, submissions to tribunal can now be done in an electronic form. There are increasing instances where experts from both sides are invited for hot-tubbing, also known as witness conferencing. During this process, presentation, discussion, and proper detailing of an expert can be a potentially deciding factor in an arbitration judgement, especially at the quantification stage.
This article was first published in Infraline Plus magazine