R EPRIN T FINANCIER WORLDWIDE

OCTOBER 2013

FINANCIER
WORLDWIDE corporatefinanceintelligence

INTERNATIONAL DISPUTE RESOLUTION

International arbitration: would a single set

of global valuation standards assist parties in
testing expert valuation evidence?
GEOFF SENOGLES AND PHIL HERSEY
CHARLES RIVER ASSOCIATES (CRA)

T he International Valuation Standards Council (IVSC) has recently

expanded its mandate to include creating a single set of high quality,
valuation standards and a globally recognised, respected valuation profession.
In this article, we consider potential implications of these developments within
the context of international arbitration proceedings. In particular, we examine
whether global valuation standards would be of benefit, by assisting arbitral
tribunals in testing expert evidence; or whether such standards would be
unhelpful by restricting the necessary discretion and professional judgement
that clients and arbitral tribunals require from independent expert witnesses.
Companies are increasingly choosing to settle disputes through arbitration
rather than in national courts. The reasons for this are well known and include Geoffrey Senogles is a vice president and Phil Hersey
the privacy of the arbitral proceedings, neutrality of the arbitrators (as compared is a principal at Charles River Associates (CRA). Mr
with national courts in certain jurisdictions), and the speed and efficiency of Senogles can be contacted on +41 22 360 8090 /
+44 (0)20 7664 3700 or by email: gsenogles@crai.
the process. Expert witnesses have an important role to play in the arbitration com. Mr Hersey can be contacted on +44 (0)20
process; providing their expert opinion to the arbitral tribunal, which would 7664 3700 or by email: phersey@crai.com.

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otherwise not be available from the
witnesses of fact or the disclosed
documentation. An expert is under a
professional obligation to express their
independent professional opinions
to the tribunal, rather than act as an
advocate for the party paying their
fees. The most frequently instructed
expert witnesses are those who opine
on damages, usually involving the
valuation of particular assets or the
assessment of lost profits.
In many professions there is a
single set of standards. For example,
International Financial Reporting
Standards (IFRS) are becoming a single
set of globally-accepted accounting
standards providing a high-quality,
common language for financial
reporting. This assists users of financial
information by providing transparent
and comparable information. The vision
of IFRS has been publicly supported
by many international organisations,
including the G20, World Bank, IMF
and Basel Committee and there has
been a very high uptake, particularly
by listed companies.
The valuation profession has
developed as a specialism practised
by professionals in diverse fields, such
as economists, accountants, surveyors
and tax advisers. As a consequence,
there may be concerns about the
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analytical consistency between
valuation practitioners. An example
of this lack of analytical consistency
was illustrated on a recent arbitration
involving the valuation of German
assets on behalf of UK debt holders.
An opposing expert disputed our
adjustment to a discount rate on the
basis that “it was not the accepted
methodology for valuing this
particular asset in Germany”. The core
disagreement between the experts on
this issue was which standard valuation
formula should be deemed relevant
– German standard or internationally
accepted.
A question that arises is whether
the desired privacy of most commercial
arbitral proceedings unwittingly
restricts holding an expert to account
for their stated opinions. That is, an
expert witness may be able to express
seemingly contradictory views in two
different matters, but because both
matters are private the (apparent)
inconsistency would not be identified
or tested under cross-examination.
There may be valid reasons for
expressing different views, based on
the specific facts of each matter, but
the expert would not be questioned
on such reasons.
As valuation standards converge,
the result should be greater consistency
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in valuations across geographies and
disciplines. There is no obvious reason
why an accounting valuation for
financial reporting purposes should
be materially different from a litigation
valuation or a taxation valuation, if they
are prepared for the same assets as at
the same date, under the same basis
and using the same data. Ultimately,
global standards would mean that
the scope of valuers to pick and mix
different approaches, sources and
methodologies would be restricted.
A current difficulty facing arbitral
tribunals is that extreme expert
witness opinions can be difficult to
expose and may simply appear to
arbitrators to be an equal argument
between two ‘opposing’ experts. In the
context of international arbitration,
opposing counsel would thus be able
to cross examine an expert on their
methodology by reference to a single
set of authoritative, global standards
rather than considering a vast array
of often conflicting textbooks and
national guidance. If necessary, the
expert witness would need to explain
where and why their analysis departs
from established norms. As such,
global standards could provide a
useful benchmark against which to
assess such expert evidence.
One recent development of note
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concerns the increasing transparency
in investment treaty arbitrations
(administered by ICSID World Bank).
For example, in a recent claim brought
by The Renco Group Inc. from New
York against Republic of Peru, the
tribunal has very recently ordered that
the proceedings, hearing transcripts
and awards all be published. In
addition, hearings in several treaty or
regional trade agreement arbitrations
administered by ICSID have been
held in public and with live video
broadcasts. Whilst this trend in treaty
disputes is not as ground-breaking as
would be the case in a commercial
dispute, it suggests that arbitrators
recognise the value of public scrutiny
in matters involving sovereign states.
Another recent development for
testing expert opinions, colloquially
referred to as ‘hot-tubbing’, involves
the tribunal hearing expert evidence
from more than one expert witness
simultaneously. In our experience,
the utility of this process depends on
the active engagement of counsel,
experts and tribunal, and the retention
of firm control by the tribunal. Where
the parties are well prepared, and are
prepared to engage, hot-tubbing can
be a valuable means of exploring the
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real issues identified between the
experts. Global valuation standards
could provide a useful technical
benchmark for counsel and the
tribunal during hot-tubbing sessions.
One argument against attempts
to ‘standardise’ the technical methods
used in the valuation profession is
that valuation is ‘an art not a science’;
implying that a valuation is merely
a subjective judgement regarding
the amount that a buyer would be
prepared to pay for an asset. However,
the existence of a ‘human’ element in
the process does not in any way mean
that the accumulation of valuation
evidence, data research and financial
analysis should be disregarded; a
rigorous, evidence-based approach
should always inform an expert’s
opinion. Applying a single set of global
standards could assist in limiting
any subjective element to a
minimum.
Another argument against the use
of international standards is that they
may stifle the necessary discretion,
which experts exercise in complex
and challenging assignments. Whilst
valuation standards may move
forward as ideas develop, the pace
of revising standards may lag behind
The views expressed herein are the views and opinions of the authors and do not reflect or represent the
views of Charles River Associates or any of the organizations with which the authors are affiliated.
Permission to use this reprint has been granted by the publisher.
the development of new, novel
valuation concepts. However, when
justified there is nothing to prevent
an expert expressing a view contrary
to the established orthodoxy; simply,
the existence of global standards
provides a consistent framework for
the evaluation of such evidence.
In commercial arbitration, the
parties are free to decide how and
where to conduct disputes – usually
in private. Whilst this confidentiality
has obvious commercial benefits
for the parties, one drawback is that
expert evidence may be subject to
a lesser degree of scrutiny than is
possible, for instance, in national
courts. Global valuation standards
may assist arbitrators and counsel in
scrutinising valuation evidence against
established norms. However, the
key to realising such benefits is the
availability and general acceptance
of a single set of valuation standards
across the majority of valuation
practitioners and users. The authors
of this article intend to follow future
developments in the field, and their
application within international
arbitration, to see whether the
ambitious goals discussed above will
be realised.
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