Publications and Presentations
April 2008

“Arbitrating Outsourcing Disputes,” Inside Sourcing

Arbitration is increasingly being used to resolve outsourcing disputes. The advantages are: the dispute can be resolved in secrecy; the parties can choose arbitrators with industry and technical knowledge; and the delays and uncertainty of litigation in an offshore country can be avoided. A typical arbitration panel consists of an arbitrator appointed by the provider and an arbitrator appointed by the customer (the "party-appointed arbitrator(s)" or "party arbitrator(s)") and a third arbitrator selected by the party arbitrators.

Key issues in arbitrating outsourcing disputes involve the roles played by the party-appointed arbitrators and by the lawyers selected by the parties to represent them in the arbitration. These issues include: (1) the role played by party-appointed arbitrators in selecting the third arbitrator; (2) why disputes generally arise under the SOWs and SLAs, and how to plan for the same; (3) what a party's lawyer needs to know about the arbitration panel and how to gain that information; and (4) how briefs should be modified when an arbitrator is not a lawyer.

Role Play by Party-Appointed Arbitrator in Selecting the Third-Party Arbitrator. A key role played by a party-appointed arbitrator occurs before arbitration proceeding begins: working with the other party arbitrator to select the third arbitrator. To do this, the party arbitrator needs two skills. First, he or she must be able to quickly determine the nature of the dispute and therefore the mix of technical, industry and legal experience that the third party arbitrator should have. Second, he or she must be able to convince the other arbitrator to agree upon the qualifications for the third party arbitrator. For example, the first party arbitrator may persuade the second party arbitrator to jointly interview third party candidates, and then use the candidates' answers to convince the second party arbitrator that certain candidates have the required qualifications. The party who appointed the arbitrator who convinced the other arbitrator to adopt the selection criteria will benefit and perhaps win the arbitration because of the manner in which the third party arbitrator was chosen.

Disputes Arise under SOWs and SLAs and Not MSAs. Most outsourcing disputes arise under the SOWs and SLAs because these documents typically set out project scope, performance standards and the parties' responsibilities. Disputes become the subject of arbitration when these documents are not sufficiently precise and leave ambiguities concerning the required performance levels and obligations. Such disputes can be resolved and arbitration avoided, or resolved quickly, if lawyers are involved in the drafting or review of these "technical" documents and make them clearly provide enforceable rights and remedies of the parties. The responsibility of the litigation lawyer representing a party in arbitration is to understand how these documents work and convince the arbitrators that they resolve the dispute.

How a Party's Lawyers Can Learn About the Arbitration Panel. To win an arbitration, a party's lawyer must understand what types of facts and arguments will persuade the arbitrators in a given case. Because arbitrators do not publish opinions, as do judges, the lawyer must create situations that allow him or her to learn this information. One way to do this is to seek an early series of "pre-trial" conferences to create situations where the arbitrators reveal the types of information and arguments that are persuasive to them.

Thinking Outside of the Box on Brief Writing. Arbitrators who are businessmen, academicians or technologists may not know how to read a legal brief properly and, in fact, may find legal briefs confusing or unpersuasive. A party's lawyer must recognize this and consider supplementing briefs with the types of documents with which the arbitrator is familiar in his or her usual business.

Conclusion. Providers and customers should take the issues described above into account in selecting arbitrators and lawyers when arbitrating an outsourcing dispute.

Copyright ©2008 by Kaye Scholer LLP. All Rights Reserved. This publication is intended as a general guide only. It does not contain a general legal analysis or constitute an opinion of Kaye Scholer LLP or any member of the firm on the legal issues described. It is recommended that readers not rely on this general guide but that professional advice be sought in connection with individual matters. References herein to "Kaye Scholer LLP & Affiliates," "Kaye Scholer," "Kaye Scholer LLP," "the firm" and terms of similar import refer to Kaye Scholer LLP and its affiliates operating in various jurisdictions.

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