- Arbitral Award
- ICC International Court of Arbitration, Geneva 9797
- Andersen Consulting Business Unit Member Firms vs. Arthur Andersen Business Unit Member Firms and Andersen Worldwide Societe Cooperative
INTER-FIRM AGREEMENT - BETWEEN THE MEMBER FIRMS OF THE ANDERSEN WORLDWIDE ORGANIZATION - ARBITRAL TRIBUNAL REQUESTED BY PARTIES TO DECIDE IN ACCORDANCE WITH TERMS OF THE CONTRACT, "TAKING INTO ACCOUNT GENERAL PRINCIPLES OF EQUITY" - REFERENCE BY ARBITRAL TRIBUNAL TO THE UNIDROIT PRINCIPLES AS "A RELIABLE SOURCE OF INTERNATIONAL COMMERCIAL LAW IN INTERNATIONAL ARBITRATION"
CONTRACT INTERPRETATION - ACCORDING TO COMMON INTENTION OF PARTIES OR, IF A COMMON INTENTION CANNOT BE ESTABLISHED, ACCORDING TO UNDERSTANDING OF REASONABLE PERSONS (ART. 4.1(1) AND (2) UNIDROIT PRINCIPLES; ART. 5:101(1) AND (2) OF PRINCIPLES OF EUROPEAN CONTRACT LAW)
CONTRACT PERFORMANCE - PARTIES ENGAGING IN UNCOOPERATIVE ACTS TO THEIR OWN BENEFIT AT THE EXPENSE OF OTHER PARTIES - CONTRARY TO PRINCIPLE OF GOOD FAITH AND FAIR DEALING INHERENT IN INTERNATIONAL CONTRACTS (ART. 1.7 UNIDROIT PRINCIPLES)
CONTRACT PERFORMANCE - OBLIGATION INVOLVING DUTY OF BEST EFFORTS - MEANING (ART. 5.4(2) [ART. 5.1.4(2) OF THE 2004 EDITION] UNIDROIT PRINCIPLES)
FUNDAMENTAL NON-PERFORMANCE - CIRCUMSTANCES RELEVANT FOR DETERMINING WHETHER NON-PERFORMANCE IS FUNDAMENTAL (ART. 7.3.1(2) UNIDROIT PRINCIPLES)
TERMINATION OF CONTRACT FOR FUNDAMENTAL NON-PERFORMANCE - RELEASES PARTIES FROM THEIR OBLIGATION TO EFFECT AND TO RECEIVE FURTHER PERFORMANCE (ARTS. 7.3.1 AND 7.3.5 UNIDROIT PRINCIPLES)
TERMINATION - RESTITUTION OF WHAT PARTIES HAD SUPPLIED UNDER THE CONTRACT - RESTITUTION IMPOSSIBLE - PARTY NO LONGER ENTITLED TO CLAIM RESTITUTION OF WHAT IT HAD SUPPLIED (ART.7.3.6 [ART. 7.3.7 OF THE 2010 EDITION] UNIDROIT PRINCIPLES)
RIGHT TO DAMAGES - PARTY ENTITLED TO COMPENSATION FOR LOSS SUFFERED ONLY IN CASE OF BREACH BY OTHER PARTY (ART.7.4.2 UNIDROIT PRINCIPLES)
Andersen Consulting Business Unit (hereinafter ACBU) and Arthur Andersen Business Unit (hereinafter AABU) are two business units of the Andersen Worldwide Organisation (hereinafter AWO). AWO, set up in 1977 to cope with the world-wide expansion of the U.S.-based partnership Arthur Andersen and Co., is a network of more than 140 member firms operating in over 75 countries and linked to each other through Member Firm Interfirm Agreements (hereinafter MFIFAs). Andersen Worldwide Société Coopérative (hereinafter AWSC), a Swiss cooperative corporation, is the administrative organ of AWO, whose primary task is to coordinate the practices of the member firms.
Originally each member firm of AWO practised indifferently accounting and audit, tax and consulting services. As a result of the 1989 restructuring member firms' practice was to be conducted through two business units: AABU for audit/attest, tax and other financial advisory services, and ACBU for strategic services, systems integration and other consulting services. Although all member firms continued to be part of AWO and were therefore required to coordinate their practices in conformity with the directives of AWSC, relationships between the two business units constantly deteriorated. On the one hand, AABU member firms, attracted by the increasingly favourable prospects of the consulting business, began developing their own consulting practices; on the other, ACBU member firms complained that such behaviour constituted undue interference with their own professional practices. Over the years several attempts were made to come to terms with the matter by defining more clearly the respective business practices to avoid undue overlapping of activities, yet ultimately without success. Finally, as AABU member firms continued to expand their consulting practices, and AWSC on its part appeared unwilling and/or unable effectively to coordinate the practices of the two Business Units, ACBU member firms filed in 1997 a request for arbitration before the ICC International Court of Arbitration.
Claimants argued that, since the 1989 restructuring had entailed the creation of two separate business units with separate scopes of practice, AABU member firms and AWSC had breached their obligations under the MFIFAs: the former by having implemented ever expanding consulting practices, thereby unduly interfering with their own business practices; the latter by having failed to coordinate the activities of member firms of the two business units and to implement guidelines to ensure compatibility among them. According to Claimants both were fundamental breaches which justified termination of their MFIFAs and payment of damages by Respondents; alternatively, should Respondents not be held liable for breach, Claimants requested to be excused from any further obligation under their MFIFAs due to irreconcilable differences.
Respondents denied the allegation of breach on the ground that even after the 1989 restructuring there was no strict separation of scopes of practice between AABU and ACBU member firms; in turn they accused Claimants of bad faith behaviour for having filed the request for arbitration instead of following the procedure provided for in the MFIFAs in cases of controversy, and requested payment of the penalty provided for in the MFIFAs.
The relevant arbitration clause in the MFIFAs stated that "[...] [t]he arbitrator shall decide in accordance with the terms of this Agreement and of the Articles and Bylaws of [AWSC]. In interpreting the provisions of this Agreement, the arbitrator shall not be bound to apply the substantive law of any jurisdiction but shall be guided by the policies and considerations set forth in the Preamble of this Agreement and the Articles and Bylaws of [AWSC], taking into account general principles of equity [...]". The Tribunal, after declaring that, should the MFIFAs and the AWSC Articles and Bylaws fail to provide guidelines for a decision, it would, pursuant to Article 17.1 of the ICC Rules, "apply general principles of law and the general principles of equity commonly accepted by the legal systems of most countries", held that "[t]he Unidroit Principles of International Commercial Contracts are a reliable source of international commercial law in international arbitration for they 'contain in essence a restatement of those 'principes directeurs' that have enjoyed universal acceptance and, moreover, are at the heart of those most fundamental notions which have consistently been applied in arbitral practice".
As to the merits the Tribunal, though admitting that AABU member firms had indeed established a broad based consulting practice that replicated and competed with the ACBU member firms' practice, held that such conduct did not constitute a breach of AABU member firms' obligations under the MFIFAs. In the Tribunal's view the MFIFAs did not, even after the 1989 restructuring, explicitly or implicitly impose any limitation (functional, geographical or otherwise) on the professional practices of the member firms, thereby precluding the AABU member firms from competing with the ACBU member firms. At most, by disrupting Claimants' business opportunities and hiring away their personnel, AABU member firms may have breached their implicit obligation to cooperate and to pursue their professional practice in accordance with the principle of good faith and fair dealing which is inherent in international contracts and expressly stated in Article 1.7 of the Unidroit Principles; however such breaches were rather rare and at any rate could not be characterized as fundamental.
By contrast the Tribunal held that AWSC undoubtedly was under a duty to ensure cooperation, coordination and compatibility among the member firms' practices. In the Tribunal's view this was a duty of best efforts, as defined in Article 5.4(2) [Art. 5.1.4(2) of the 2004 edition] of the Unidroit Principles, that AWSC had failed to comply with. Indeed, when the scope of service conflict between AABU and ACBU member firms surfaced and extended AWSC failed to take any action to ensure cooperation, coordination and compatibility among the practices of the AABU and ACBU member firms. Moreover, referring to the criteria set forth in Article 7.3.1(2) of the Unidroit Principles, the Tribunal found that AWSC's failure amounted to a fundamental non-performance which, in accordance with Articles 7.3.1(1) and 7.3.5(1) of the Unidroit Principles, justified the termination of Claimants' MFIFAs and Claimants' release from all their obligations to AWSC and the AABU member firms under the MFIFAs for the future.
However the Tribunal rejected Claimants' request for damages, as in its view none of the Repondents' acts, which according to Claimants had caused a loss, constituted a breach. With respect to Claimants' request for restitution of the transfer payments made to the AABU member firms since 1994, the Tribunal, invoking the general principle of law, as stated in Article 7.3.6(1)[Art. 7.3.7(1) of the 2010 edition] of the Unidroit Principles, that upon termination of the contract either party may claim restitution of whatever it has supplied provided that such party concurrently makes restitution of whatever it has received, found that since Claimants were unable to return the benefits they had received under the MFIFAs they were not entitled to the restitution of the transfer payments.
The Tribunal likewise rejected Respondents' counterclaim for payment by Claimants of the penalty provided for in the MFIFAs. According to the MFIFAs such penalty was due only where the member firm(s) terminating the MFIFAs is (are) the party at fault. In the case at hand the MFIFAs were terminated as a consequence of AWSC's fundamental breach, while Claimants were not at fault.
The Tribunal finally held that with the termination of the MFIFAs Claimants lose their right to use the Andersen name or any derivative thereof. However in order to allow Claimants a reasonable period of time to adjust to the new situation, the Tribunal set December 31, 2000 as the date after which Claimants were to cease using the Andersen name.
INTERNATIONAL COURT OF ARBITRATION INTERNATIONAL CHAMBER OF COMMERCE
Case No. 9797/CK/AER/ACS
In the Arbitration of
ANDERSEN CONSULTING BUSINESS UNIT MEMBER FIRMS
ARTHUR ANDERSEN BUSINESS UNIT MEMBER FIRMS
ANDERSEN WORLDWIDE SOCIÉTÉ COOPÉRATIVE
I. THE PARTIES AND THE ARBITRATION CLAUSE
Claimants are the Andersen Consulting Business Unit (ACBU) member firms [...] Respondents are the Arthur Andersen Business Unit (AABU) member firms [...] and Andersen Worldwide Société Coopérative (AWSC), a Swiss Cooperative entity.
The relevant arbitration clause to decide the present dispute is the following:
“ [...][A]ny and all disputes which cannot be settled amicably, including any ancillary claims of any party, arising out of or in connection with this Agreement (including the validity, scope and enforceability or this arbitration provision) shall be finally settled by arbitration conducted by a single arbitrator in Geneva, Switzerland. The proceedings shall be conducted pursuant to the then-existing Rules of Conciliation and Arbitration of the International Chamber of Commerce, except that the parties may select an arbitrator who is a national of the same country as one of the parties. [...] The arbitrator shall decide in accordance with the terms of this Agreement and of the Articles and Bylaws of Andersen, S.C. In interpreting the provisions of this Agreement, the arbitrator shall not be bound to apply the substantive law of any jurisdiction but shall be guided by the policies and considerations set forth in the Preamble of this Agreement and the Articles and Bylaws of Andersen, S.C., taking into account general principles of equity [...].”
II. THE PROCEEDINGS
Claimants filed a Request for Arbitration before the International Court of Arbitration of the International Chamber of Commerce on December 17, 1997. The Request was duly notified to the Respondents.
Respondents submitted their answers to Claimants’ Request for Arbitration and objected to the Tribunal’s jurisdiction. AWSC also filed Counterclaims against the ACBU member firms.
On October 5, 1998 the parties signed the Terms of Reference and agreed on a procedural schedule for the present arbitration
On April 29, 1999 the Tribunal issued an Interim Award on Jurisdiction […]. The Tribunal also ruled on the appropriate rules of law governing the parties’ dispute.
III. APPLICABLE LAW
The Tribunal found that the Member Firm Interfirm Agreements (MFIFAs) entered into between AWSC and the Andersen Worldwide Organization member firms, together with the AWSC Articles and Bylaws are the relevant rules of law chosen by the parties to govern the present arbitration; in interpreting the provisions of the MFIFAs the arbitrator is not bound to apply the substantive law of any jurisdiction but shall be guided by the policies and considerations set forth in the Preamble to the MFIFAs and the Articles and Bylaws of AWSC; if the MFIFAs and the AWSC Articles and Bylaws are silent or do not provide guidelines for a decision, the Tribunal shall, pursuant to Article 17.1 of the ICC Rules, apply the rules of law it deems appropriate; those rules of law shall be the general principles of law and the general principles of equity commonly accepted by the legal systems of most countries.
The UNIDROIT Principles of International Commercial Contracts are a reliable Fonti of international commercial law in international arbitration for they “contain in essence a restatement of those ‘principes directeurs’ that have enjoyed universal acceptance and, moreover, are at the heart of those most fundamental notions which have consistently been applied in arbitral practice.”
IV. STATEMENT OF FACTS
C. THE INTERNATIONAL EXPANSION OF ARTHUR ANDERSEN & CO. AND THE
CREATION OF THE AWO
Arthur Andersen & Co. began to expand internationally in the 1930’s.
As the firm increased its global presence its leadership realized that a new structure was indispensable in order to address several legal, regulatory, tax and professional restrictions in the countries where it operated. In 1977 the firm created that new structure: the Andersen Worldwide Organization (AWO), designed to maintain the one firm concept and deliver uniform seamless service to clients across the world. The AWO is comprised of a Swiss cooperative entity, Arthur Andersen & Co. Société Coopérative (AWSC) acting as an “umbrella“ entity for the organization, the AWO member firms and the Partners of AWSC, inter alia.
AWSC was created to coordinate on a worldwide basis, the professional practices of its Practice Partners who are its members and of their member firms; to serve as the instrumentality through which the AWSC partners participate in shaping and implementing the reciprocal commitment of their reFonti and the coordination of their common efforts on a worldwide basis (Bylaws at Preamble). AWSC was not to engage in any professional practice of its own.
Every member firm and its Practice Partners enter into a Member Firm Interfirm Agreement (MFIFA) with AWSC, substantially in the form of a standard version approved by the AWSC partners, pursuant to which the member firm and/or its Practice Partners agree to adhere to professional standards and principles coordinated by AWSC, subject to compliance with applicable laws and professional regulations, to adopt appropriate compatible policies and to carry out certain other responsibilities.
D. THE 1989 RESTRUCTURING
As the AWO developed through the years, various difficulties began to strain the relationships between the partners practicing in the Accounting and Audit and Tax divisions on one side and those practicing in the MICD [Management Information Consulting Division] on the other. The earnings disparity between practices, the need for a new governance framework in light of the firm’s internationalization, the desire of each division to run its own business and the regulatory issues stemming from auditors’ independence requirements caused discomfort among the consulting partners and dissatisfaction with the status quo.
The amendments to the AWO organizational documents became effective on September 1‚ 1989.
Thereafter, the member firms’ practice was to be “conducted through two business units: ARTHUR ANDERSEN for audit/attest, tax and other financial and specialty advisory services, and ANDERSEN CONSULTING for strategic services, systems integration, information technology consulting and change management services.“
E. THE AWO GOVERNING DOCUMENTS AFTER THE 1989 RESTRUCTURING
AWSC did not suffer substantial changes as a consequence of the 1989 Restructuring. The purpose of this cooperative entity continued to be the coordination of the professional services practices of its partners’ member firms on an international basis.
As a coordinating body for the member firms, AWSC has the obligation to arrange for the performance of other functions such as developing quality control standards and procedures and other related policies, practices and procedures to assure a consistent and uniformly high quality of professional service by member firms; developing and implementing practice reviews programs to assure effective implementation by the member firms of such quality control standards and procedures and other related policies, practices and procedures; developing compatible policies and professional standards for member firms; developing annual operating plans to assure effective coordination of the member firms’ practices; overseeing the development and use of Andersen Technology and regulating the use of the Andersen name by member firms and/or their right to hold themselves out to the public or otherwise represent themselves to be member firms [Paragraph 2.1. MFIFA].
G. SCOPE OF SERVICE ISSUES AND THE BUSINESS UNITS’ STRATEGIES
Shortly before leaving office as AWSC Managing Partner-Chief Executive, Mr. Kullberg [in April 1989] wrote a memorandum for the AWSC file[…] [H]e was convinced that the potential for scope conflicts had developed from the creation of the two business units.
The unresolved scope of practice issue quickly gained momentum within the AWO[…]. The conclusions - known as the Florida Accords - drawn by the Executive Committee and supported by the AWSC Board of Partners, proclaimed that although each business unit had to be a vigorous competitor in its own marketplace, its strategies had to fit within the overall strategy of the firm[…].
The AABU member firms were given primary responsibility for systems consulting when the environment consisted of “proven hardware [and] prepackaged software, including the use of data bases and report writers for management information but excluding custom programming and modification of code; and (…) [when] consolidated revenues of the client [were] below $175 million.“
The ACBU member firms were given primary responsibility when the client’s consolidated revenues were in excess of $175 million “and regardless of size, when the environment [was] more complex that that set out above.
In April 1990 Arthur Andersen Co. LLP (the U.S. AABU member firm) represented […] to the [U.S.] Securities and Exchange Commission that “[a]n important objective of the restructuring was the delineation of separate scopes of practice for Arthur Andersen Co and Andersen Consulting. Thus, Andersen Consulting offers clients a broad range of information technology consulting services. It does not however perform attest services or hold itself out as engaging in the practice of public accounting.”
The scope of services issue did not cease to create friction after the Florida Accords, particularly in business systems consulting, strategic services and operational consulting.
In 1993, the AWSC Executive Committee issued a new set of guidelines - known as the 1993 Protocols - the Preamble to which acknowledges: “[a]s the Firm has developed new expertise based on our core competencies and found new and better ways to serve clients, scope-of-practice ambiguities and skills overlaps between partners in the business units have increased, particularly in operational consulting and to a lesser degree in business systems consulting.“
Like the Florida Accords, the 1993 Protocols established business unit cooperation guidelines for the Operational Consulting/Business Reengineering area but recognized in addition, that service overlap and competition in this area were inevitable and desirable.
H. THE CREATION OF ARTHUR ANDERSEN BUSINESS CONSULTING
In December 1994, the AABU member firms combined their Business Systems Consulting and Operation Consulting practices to form Arthur Andersen Business Consulting (AABC).
By October 1995 it was apparent that in many instances the AWSC partners did not want to work together. The expansion of both business units had caused service overlap and marketplace confusion had resulted from the way each business unit positioned itself in advertising and how it recruited on campuses.
L. THE TRANSFER PAYMENTS
Under the MFIFAs, the AWO member firms are entitled to receive or bound to pay, as the case may be, an annual amount from or to the other member firms as a reciprocal of a commitment to cooperative action in serving common clients on an international basis and to reflect equitably the mutual and interdependent benefits of such practices […].
In compliance with the transfer payment provisions, the ACBU member firms have transferred US $453.7 million to the AABU member firms since the 1989 Restructuring; of this amount US $397.6 million were transferred since 1994.
The ACBU member firms have placed US $476.2 million in an interest-bearing escrow account pending the result of the present arbitration. The moneys deposited comprise the transfer payments due to the AABU member firms for fiscal years 1998 and 1999.
A. WHETHER AABU MEMBER FIRMS BREACHED THEIR MATERIAL OBLIGATIONS UNDER THEIR MFIFAS BY:
- ESTABLISHING A BROAD-BASED AND EXPANDING BUSINESS CONSULTING PRACTICE THAT AND COMPETES WITH ACBU MEMBER FIRMS’ BUSINESS;
- DISRUPTING CLAIMANTS’ BUSINESS OPPORTUNITIES;
- MISAPPROPRIATING THE ANDERSEN CONSULTING NAME AND ACBU MEMBER FIRMS’GOOD WILL;
- CAUSING MARKETPLACE CONFUSION;
- SEEKING TO HIRE AWAY ACBU MEMBER FIRMS’ PERSONNEL OR INTERFERING WITH ACBU’S RECRUITING OF PERSONNEL;
- TRADING ON CLAIMANTS’ CREDENTIALS AND EXPERTISE.
1. Whether the AABU member firms established a broad-based and expanding business consulting practice that replicates and competes with ACBU member firms’ business
Claimants accuse the Respondent member firms of expanding their advisory business into information technology consulting, strategic consulting, change management consulting and business process consulting, at least from 1994, when the AABU leadership announced the creation of its AABC practice.
The Respondent member firms acknowledge that AABC’s services and skills are similar and in some degree overlap with those offered by Claimants but affirm that this overlap is not appreciable because the basic core competencies and the target markets of each business unit are different.
[…] [T]he Tribunal finds that Arthur Andersen Business Consulting is in fact, a broad based consulting practice that replicates and competes in some instances with the ACBU member firms’ practice.
2. Whether the MFIFAs prohibit the AABU member firms from establishing a broad based consulting practice practice that replicates and competes in some instances with with the ACBU member firms
Several provisions in the MFIFAs and the AWSC Articles and Bylaws regulate cooperation, coordination and compatibility among the practices of the AWO member firms.
The Tribunal does not construe any of these principles as barring any individual member firm or a group of member firms from offering and performing services rendered by other member firms to the same segment of the marketplace. Indeed, the MFIFAs do not, explicitly or implicitly, impose any limitation (functional, geographical or otherwise) on the professional practices of the member firms.
These principles […] require that the member firms’ practices be developed in accordance with the policies and standards dictated by AWSC in furtherance of the common goals of cooperation, coordination and compatibility among member firms.
The relevant evidence does not lead to a different conclusion or support the contention that a clear-cut separation of scope of practices between the AABU and the ACBU member firms was agreed as a premise of the 1989 Restructuring.
The Tribunal’s interpretation is also founded on the AWSC leadership’s pronouncements during the years following the 1989 Restructuring that the scope of services issue had to be dealt with by the AWSC governance structure.
[T]he Florida Accords [and] the Portugal Protocols […] are all admissions of AWSC’s responsibility to deal with the scope of practice conflicts. […] Had the MFIFAs imposed a limitation on the member firms’ practices, the Accords and Protocols and all the other proposals to resolve the internal AWO conflicts would have been unnecessary.
In this light, the Tribunal finds the MFIFAs do not preclude the AABU member firms from competing with the ACBU member firms.
Claimants also accuse the AABU member firms of transgressing their obligations under the MFIFAs by ignoring legally binding AWSC policies and practices expressed in the Florida Accords and 1993 Protocols, which the AABU member firms were obliged to adopt. In Respondents’ opinion, the Accords and Protocols are not binding on the member firms and do not prohibit overlap of services.
Hence, the issue before the Tribunal is whether the Accords and Protocols are binding policies recommended by AWSC […] or simple internal AWSC management guidelines.
The Tribunal favors the second interpretation.
The Florida Accords and 1993 Protocols are […] internal guidelines to be applied by the business unit management lines in fulfilling their coordinating responsibilities. Consequently, the AABU member firms could not have breached any obligation under those guidelines.
3. Whether the AABU member firms disrupted Claimant’s business opportunities, hired away ACBU member firms’ personnel, interfered with ACBU member firms’ recruiting of personnel, caused marketplace confusion, traded on Claimants’ credentials and expertise and misappropriated the Andersen Consulting name and the ACBU member firms’ good will
The ACBU member firms additionally accuse the Respondent member firms of breaching their obligations under the MFIFAs on the counts described above.
In the Tribunal’s view, only a few situations described by Claimants can be categorized as a breach under the MFIFAs.
The MFIFAs contain no provision explicitly prohibiting that conduct, but the contractual agreements among the parties forbid the AWO member firms to engage in uncooperative acts to benefit themselves at the expense of other member forms. Such acts are contrary to the member firms’ implicit obligation to cooperate and to pursue their professional practice in accordance with the principle of good faith and fair dealing inherent to international contracts.
Placed in the context of a longstanding relationship with thousands of potentially conflictive situations, those breaches cannot be characterized as fundamental.
B. WHETHER AWSC BREACHED ITS MATERIAL OBLIGATIONS UNDER THE MFIFAS BY:
- FAILING TO COORDINATE AND ENSURE COMPATIBILITY BETWEEN THE PRACTICES, ETHICAL PRINCIPLES AND POLICIES OF THE MEMBER FIRMS;
- ALLOWING THE AABU MEMBER FIRMS TO COMPETE WITH CLAIMANTS;
- FAILING TO DEVELOP AN ANNUAL OPERATING PLAN DESIGNED TO ASSURE THE EFFECTIVE COORDINATION, ON AN INTERNATIONAL BASIS, OF THE PRACTICES OF THE MEMBER FIRMS;
- FAILING TO ENFORCE THE MUTUAL OBLIGATIONS BETWEEN ACBU MEMBER FIRMS AND AABU MEMBER FIRMS;
- FAILING TO REGULATE THE USE OF THE “ANDERSEN“ OR OTHER NAMES.
1. AWSC’s obligation to coordinate the practices of the member firms
Claimants accuse AWSC of disregarding “its core function to assure that the basic purpose of the 1989 Restructuring is met and to act as the coordinator of all Member Firms and the implementor of guidelines and policies to ensure compatibility among and the harmonious operation of all Member Firms”. (emphasis provided in text)
The ACBU member firms’ contention rests on one basic assumption: AWSC has the obligation to coordinate the member firms’ practices. AWSC answers that with minor exceptions, the MFIFAs do not impose an obligation on AWSC to coordinate.
In the Tribunal’s view, the language of the AWO organizational documents is not in accordance with AWSC’s interpretation.
Member firm coordination is the cornerstone of the MFIFAs; it is the means to ensure that the AWO’s cooperative goals are achieved. If adequate coordination were not well-founded and properly ensured in an organization such as the AWO - comprised of more than one hundred member firms worldwide - cooperation would be seriously impaired.
By entering into an MFIFA, a member firm appoints AWSC to arrange for the coordination of its professional practice on an international basis with that of the other member firms (Paragraph 2.1 of the MFIFAs) and legitimately expects its professional practice to be coordinated with that of the other member firms. Conversely, AWSC accepts such appointment and the responsibilities inherent to the coordinating function.
In summary, the explicit MFIFA provisions, interpreted in light of the purposes and policies set forth in the Preamble thereto and in the AWSC Articles and Bylaws, demonstrate that AWSC’s essential obligation is to coordinate the AWO member firms’ diverse professional practices […]. Indeed, since its creation in 1977, AWSC’s purpose has been the coordination of its member firms on an international basis. (Preamble to the AWSC Bylaws).
The Tribunal finds that the wording of these purposes, policies and functions indicates that AWSC must exercise its best efforts to ensure cooperation, coordination and compatibility among the member firms’ practices.
Albeit the creation of the business units significantly altered AWSC’s internal structure, none of the changes to the AWO organizational documents modified AWSC’s obligations in any meaningful way.
2. Whether AWSC breached its obligations to coordinate the practices of the member firms
Did AWSC exercise its best efforts to achieve cooperation, coordination and compatibility between the practices of the AABU and ACBU member firms? As explained below, AWSC failed to fulfil such responsibility.
While each business unit developed and implemented its own uncoordinated individual strategy, AWSC proved unable to devise an organizational framework or operating plan for all the member firms’ practices.
Likewise, AWSC did not act to resolve the scope of service conflict, despite the internal tensions and lack of cooperation between the AABU and ACBU member firms.
The Tribunal is aware of the AWSC Executive Committee’s initial effort to tackle the scope of practice conflict by drawing internal guidelines for business unit cooperation in the Florida Accords. Nevertheless […] the Accords were not properly implemented by AWSC.
When the Executive Committee tardily developed a new set of guidelines [the 1993 Protocols] to address the scope of service issues, it was forced to admit a stalemate at the policy level and the leadership’s responsibility for not resolving the conflict [...].
Predictably, before the end of 1993 the AWSC partners surfaced their discontent with the Protocols and urged the AWO leadership to expedite the resolution of the internal conflicts.
A year later, the AABU launched the AABC practice. The AABU member firms’ expansion into the information technology area, both in terms of capabilities and target market, substantially increased the opportunities for the member firms of each business unit to perform similar services to similar clients.
Even under those pressing circumstances the AWSC management was unable to agree on a course of action to address the scope of practice dispute or to draft a proposal for the consideration of the AWSC partners [...].
AWSC neglected to address the scope of practice conflict, even after the Board of Partners […] had admitted that the status quo was unacceptable and unsustainable.
On these grounds, the Tribunal finds AWSC did not make its best efforts to ensure coordination, cooperation and compatibility among the practices of the AABU and ACBU member firms, because it failed to take any course of action when the scope of service conflict surfaced and extended; and because it failed to develop the annual operating plans required to coordinate the practices of all the AWO member firms.
AWSC further contends it cannot function independently of the collective will of its partners since its governance structure provides substantial authority to its partners.
This is an overstatement. Truly, the AWSC partners have substantial authority as a group, but certain decisions comprising overall policies, long-range plans and objectives and scope of service definitions are the responsibility of the Board of Partners acting upon recommendation of the Administrative Council and/or the Chief Executive. (Article 1 6(B)(1 ) of the AWSC Articles).
4. Whether AWSC’s breach amounts to a fundamental non-performance of its obligations
AWSC’s neglectful conduct is a breach of its obligations to coordinate the practices of the ACBU with those of the AABU member firms, to develop compatible policies and professional standards for member firms and to develop annual operating plans to assure the effective coordination of the member firms’ practices (Paragraph 2.1 of the MFIFAs).
AWSC contends that any such breaches are not sufficiently material to warrant termination. “The UNIDROIT factors - says AWSC - make clear that there has been no material, fundamental breach.”
The UNIDROIT criteria cited by AWSC proclaim [Article 7.3.1(2) of the UNIDROIT PRINCIPLES]:
“In determining whether a failure to perform an obligation amounts to a fundamental non-performance regard shall be had, in particular, to whether
a. the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result;
b. strict compliance with the obligation which has not been performed is of essence under the contract;
c. the non-performance is intentional or reckless;
d. the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance;
e. the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated.”
In light of the above findings, AWSC’s conduct amounts to a fundamental non-performance of its obligations under the MFIFAs.
First, AWSC failed to coordinate all the AWO member firms, particularly by neglecting two of its critical functions: to develop annual operating plans for all the member firms’ practices and to make its best efforts to address and resolve the scope of service issue.
AWSC’s failure to exercise its best efforts to coordinate the member firms’ practices substantially deprived Claimants of the cooperation they were entitled to expect under the MFIFAs.
Second, strict compliance by AWSC of its obligation to coordinate the practices of the ACBU and the AABU member firms is of the essence of the MFIFAs.
Third, AWSC’s non-performance gives Claimants reason to believe that they cannot rely on AWSC’s future performance.
Fourth, Respondents will not suffer a disproportionate loss as a result of the preparation or performance if Claimants’ MFIFAs are terminated.
AWSC cannot possibly suffer any harm from the termination of its contractual relationship with the ACBU member firms because AWSC is an instrumentality for the purpose of coordinating the member firms’ professional practice [...]
Moreover, the AABU member firms’ past performance to the ACBU member firms has been more than compensated by the significant amounts received from the ACBU member firms as transfer payments.
Respondents’ reliance on Paragraph 17.2 of the MFIFAs to determine the damages suffered as a result of Claimants’ departure from the AWO is unfounded. The MFIFAs explicitly state that those liquidated damages are to be presumed as a valid measure of actual damages suffered by the party entitled to payment. Among them are the increased costs of establishing a relationship with other suitable practice entities or those associated with the inability to establish such replacement relationships, and the related decrease in revenues.
Respondents have neither right to termination payments nor the apparent need to establish new relationships with other suitable practice entities. The ACBU and AABU member firms virtually operate as two separate global partnerships with extensive and substantial consulting skills resident in the AABC practice.
D. WHETHER THE ACBU MEMBER FIRMS HAVE ENGAGED IN INEQUITABLE CONDUCT AND/OR BREACHED THEIR CONTRACTUAL AND FIDUCIARY OBLIGATIONS TO THE AABU MEMBER FIRMS BY:
- PLANNING AND EXECUTING A BAD FAITH STRATEGY TO SEPARATE FROM THE AWO AND AVOID THEIR OBLIGATIONS UNDER THEIR MFIFAS INCLUDING THOSE APPLICABLE UPON TERMINATION;
- FILING THIS PROCEEDING IN BAD FAITH;
- FILING THIS PROCEEDING WITHOUT COMPLYING WITH THE CONTRACTUAL NOTICE PROVISIONS;
- DISPARAGING THE AABU MEMBER FIRMS AND THE AWO IN THE WORLDWIDE PRESS AND WITH CLIENTS, POTENTIAL CLIENTS, EMPLOYEES, RECRUITS AND/OR THE GENERAL PUBLIC;
- DISRUPTING RESPONDENTS’ BUSINESS OPPORTUNITIES;
- TRADING ON AABU MEMBER FIRMS’ CREDENTIALS AND EXPERTISE;
- REFUSING TO TEAM/WORK JOINTLY WITH AABU MEMBER FIRMS ON VARIOUS AWO ENGAGEMENTS AND POTENTIAL ENGAGEMENTS;
- REFUSING TO SERVE AND/OR ABANDONING CERTAIN CLIENTS AND POTENTIAL CLIENTS OF THE AABU MEMBER FIRMS AND THE AWO;
- REFUSING TO SHARE INFORMATION, TRAINING MATERIAL, AND/OR TECHNOLOGY WITH THE AABU MEMBER FIRMS;
- REFUSING TO REFER CLIENTS TO THE AABU MEMBER FIRMS.
3. Filing this proceeding without complying with the contractual notice provisions
Paragraph 14 of the MFIFAs enumerates several termination events, among them, the proviso of Paragraph 14.2 (F), governing unilateral termination by a wronged party. Separate from the unilateral termination clause the MFIFAs also contain certain arbitration provisions for the resolution of any and all disputes which cannot be settled amicably, arising out of or in connection with the MFIFAs (Paragraph 22.1 of the MFIFAs) and regardless of whether the complaining party seeks to be released from its obligations under the MFIFAs.
The two paragraphs clearly regulate different events and offer a wronged party the alternative rights to terminate its MFIFA when a material breach has occurred or to resort to arbitration in search of a final decision that will resolve a dispute with another party.
In the event of unilateral termination, the notice of breach is an essential condition for the aggrieved party to be relieved from its obligations insofar as it sets in motion the procedure regulated in Paragraph 14.2 (F). Such notice has not been established however, as a condition precedent to the commencement of an arbitration proceedings.
Claimants elected to exercise their right to arbitration under Paragraph 22 of the MFIFAs, instead of unilaterally terminating their MFIFA and therefore were not under the obligation to serve AWSC with a notice of breach.
Thus, Claimants did not file this proceeding in disregard of the notice provisions contained in the MFIFAs
7. Refusing to teamwork jointly with AABU member firms on various AWO engagements and potential engagements
The Respondent member firms accuse Claimants of systematically failing to cooperate since the early 1990s, by refusing to team with them and declining to share reFonti including common support structures and personnel.
The Tribunal found eleven instances prior to this filing of this arbitration, of ACBU member firms acting uncooperatively by, inter alia, halting previous joint industry studies; excluding AABU member firms from engagements for clients introduced by AABU partners to ACBU member firms; excluding AABU personnel previously committed to work on certain ACBU member firm engagements and backing out of joint proposals with AABU member firms.
That conduct is contrary to the member firms’ implied obligation to cooperate under the MFIFAs and to the explicit obligation to pursue their professional practice with respect to one another in accordance with the principle of good faith and fair dealing, inherent to international contracts.
Nevertheless, the events portrayed by the AABU member firms are not a material breach of the MFIFAs, particularly if those events are placed in the context of a long-standing relationship involving thousands of potentially conflicting situations.
E. WHETHER THE ACBU MEMBER FIRMS’ ALLEGED BAD FAITH FILING OF THIS PROCEEDING BREACHES OF THEIR OBLIGATIONS TO THE AABU MEMBER FIRMS, AND OTHER INEQUITABLE CONDUCT BOTH BEFORE AND AFTER THE FILING OF THE PROCEEDING BAR THE RELIEF THE ACBU MEMBER FIRMS ARE REQUESTING
The Tribunal found that Claimants had not filed the present arbitration in bad faith, materially breached any obligation to the AABU member firms or engaged in any inequitable conduct either before or after the filing of the arbitration. Thus, Claimants’ conduct does not bar them from the relief requested.
G. WHETHER CLAIMANTS ARE ENTITLED TO BE EXCUSED FROM FURTHER OBLIGATIONS TO AWSC AND THE AABU MEMBER FIRMS UNDER THE MFIFAS
While AWSC breached its obligations to the ACBU member firms under Claimants’ MFIFAs and was responsible for a fundamental non-performance thereunder, Claimants did not engage in inequitable conduct or breach their contractual or fiduciary obligations.
It is a well established rule of law that a fundamental breach of a contract gives the aggrieved party the right to terminate the contractual relationship. This general rule is reflected in the MFIFAs which provide that the effect of a material breach thereto entitles the wronged party to terminate its MFIFA (Paragraph 14.2 (F) of the MFIFAs).
Under the UNIDROIT Principles of International Commercial Contracts, a party may terminate a contract when the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance. The consequence of termination is to release the parties from their obligation to effect and to receive further performance.
On account of AWSC’s fundamental non-performance, the ACBU member firms’ MFIFAs are terminated. Consequently, Claimants are released from all their obligations to AWSC and the AABU member firms under the MFIFAs as of the date the present award is notified to the parties.
H. WHETHER CLAIMANTS ARE ENTITLED TO RECOVER FROM RESPONDENTS ANY SUMS BY WAY OF INTEREST, DAMAGES OR COMPENSATION UNDER OR IN RESPECT OF SUCH BREACHES IF ANY, AND THE AMOUNT THEREOF
Claimants seek an award of US$100 million for damages caused to the Andersen Consulting brand and reputation, originated in marketplace confusion caused by AABC.
The tribunal found that the AABU member firms did not breach their obligations under the MFIFAs by causing confusion in the marketplace. For this reason the ACBU member firms cannot claim any harm from the alleged breach and are not entitled to any compensation (Article 7.4.2 of the UNIDROIT Principles).
AWSC on the other hand, breached its material obligations under the MFIFAs by failing to coordinate the practices of the ACBU and AABU member firms. However, AWSC was not under the duty to coordinate the practices of the member firms by drawing clear distinctions among the member firms’ marketplace images. Thus, none of the damages alleged by Claimants are a consequence of AWSC’s non-performance.
Claimants also seek restitution of the transfer payments made to the AABU member firms since 1994, including the transfer payments placed in escrow, plus interest thereon.
The Tribunal has ruled that Claimants’ MFIFAs are terminated as of the date this Award is notified to the parties.
Under general principles of law, upon termination of the contract either party may claim restitution of whatever it has supplied, provided that such party concurrently makes restitution of whatever it has received (See Article 7.3.6(1) of the UNIDROIT Principles). Thus, restitution necessarily entails that both parties return what they have received under the contract.
Restitution of the benefits received by Claimants is impossible. In fact, the ACBU member firms do not even offer to do so.
If the Tribunal were to grant the restitution of transfer payments made by Claimants, they would be unjustly enriched.
The Tribunal shall not grant Claimants the restitution they requested.
J. PROVIDED THE ARBITRATOR FINDS THAT ANY OR ALL CLAIMANTS ARE ENTITLED FOR ANY REASON TO BE EXCUSED FROM ANY OF THEIR OBLIGATIONS UNDER THEIR RESPECTIVE MFIFAS, WHETHER THOSE EXCUSED CLAIMANTS SHOULD:
- PAY DAMAGES TO AWSC;
- MEET THEIR OBLIGATIONS UNDER THE MFIFAS THROUGH AND INCLUDING THE EFFECTIVE DATE OF THE TERMINATION;
- CEASE USING THE “ANDERSEN” NAME OR ANY DERIVATIVE THEREOF OR ANY OTHER NAME AWSC IS AUTHORISED TO REGULATE;
- CEASE TO REPRESENT THEMSELVES AS IN ANY WAY ASSOCIATED WITH AWSC OR THE REMAINING MEMBER FIRMS, AND
- RETURN AND CEASE USING ANDERSEN TECHNOLOGY.
1. Claimants’ obligation to pay damages to AWSC
It is a general rule of law that only the party which has willfully or negligently breached its obligations under a contract and has thereby inflicted a loss upon another is liable for damages.
The Tribunal found AWSC had breached its material obligations to coordinate the practices of the ACBU member firms with those of the AABU member firms. AWSC’s failure to act was the cause of termination of Claimants’ MFIFAs and constituted a fundamental non-performance thereunder. For this reason, AWSC is deemed the party at fault.
The provisions of Paragraph 17.2 (A) of the MFlFA on which Respondents specifically rely to demand the termination payments from Claimants require that the ACBU member firms be at fault, which they are not. Therefore, Claimants are under no obligation to make the Paragraph 17.2 (A) termination payments.
3. Claimants’ obligations to cease using the “Andersen” name or any derivative thereof, or any other name AWSC is authorised to regulate and to cease representing themselves as in any way associated with AWSC or the remaining member firms.
The Tribunal finds that Claimants cannot take with them the property to which Arthur Andersen LLP holds legal title. Moreover, it would be unfair to allow the ACBU member firms to keep a name built through the common effort of those men and women who had preceded the actual AWSC partners.
Therefore, effective on December 31‚ 2000 Claimants shall cease using the Andersen name or any derivative thereof, or any other name AWSC is authorized to regulate and shall cease to represent themselves as in any way associated with AWSC or the AABU member firms.
The term for the ACBU member firms to cease using the Andersen name and to cease to represent themselves as associated with Respondents has been fixed by the Tribunal in order to allow Claimants a reasonable time frame to make the necessary changes and adjustments resulting from the resolution of the present counterclaim.
4. Claimants’ obligation to return and cease using Andersen Technology
[…] Neither the MFIFAs, nor any other AWO governing document known to the Tribunal provide an answer. Therefore, the general principles of law are the appropriate rules to decide this matter.
Under general principles of law, contracts must be interpreted according to the common intention of the parties. If the intention cannot be established, the contract should be interpreted in light of the meaning reasonable persons of the same kind as the parties would give to it in the same circumstances.
It would not be reasonable to hold - and reasonable persons of the same kind as the parties to this arbitration could not possibly claim - that the member firms not paying for or participating in the development of Andersen Technology are common owners of such technology or that the entities which funded and developed it are bound to forfeit their rights to those who have no title thereto.
Equity would not dictate a different solution. Indeed, the Tribunal found that the Respondent member firms established a broad-based consulting practice that competes with Claimants’ activities. For this reason, it would be unfair to compel the ACBU member firms to surrender their technology which would capacitate the competing AABU member firms in Claimants’ core activities.
Upon the issues addressed by the Tribunal, it is hereby adjudged:
A. The Respondent AABU member firms did not materially breach their obligations to Claimants under the Member Firm Interfirm Agreements on any of the grounds alleged by the ACBU member firms.
B. AWSC breached its material obligations to Claimants under the Member Firm Interfirm Agreements by failing to coordinate the practices of the ACBU member firms with those of the AABU member firms.
C. AWSC did not breach its material contractual and fiduciary obligations to Claimants under the Member Firm Interfirm Agreements by adopting a Resolution creating the “AWO Protection Committee“.
D. Claimants acted in good faith, with a proper basis and in accordance with the Member Firm Interfirm Agreements in filing their Request for Arbitration and ¡n their subsequent actions in connection with the arbitration proceedings.
E. The relief requested by Claimants can be granted even if less than all the AWO member firms are parties to the present arbitration.
F. Claimants are excused from any further obligations under the Member Firm lnterfirm Agreements to the AWSC and the AABU member firms as a result of AWSC’s fundamental non-performance of its contractual and fiduciary obligations under the Member Firm Interfirm Agreements.
G. Claimants are not entitled to restitution or to recover from Respondents any sums by way of damages, interest or compensation.
H. Claimants are not bound to make any termination payments or to pay any other damages to Respondents.
I. Claimants shall meet all their obligations under the Member Firm Interfirm Agreements through and including the date of termination thereof.
J. No later than December 31 ‚ 2000 Claimants shall cease using the “Andersen“ name or any derivative thereof or any other name AWSC is authorized to regulate and shall cease to represent themselves as associated with Respondents.
K. Claimants shall return and cease using the Andersen Technology jointly owned, controlled and developed by Claimants and the Respondent member firms. Claimants shall keep the Andersen Technology jointly owned, controlled and developed by the ACBU member firms.
L. Claimants shall not reimburse AWSC for the costs, expenses and liabilities, including attorneys’ fees, incurred by AWSC as a result of the relief granted by the Tribunal. The Respondent member firms shall reimburse AWSC for its costs, expenses and liabilities, including attorneys’ fees incurred in the present arbitration as set forth in Paragraph 8.1 of the Member Firm Interfirm Agreements.
M. All the amounts placed in escrow including interest thereon, in respect of obligations owed to or for the benefit of the Respondent AABU member firms, shall be paid to said Respondent AABU member firms as directed by AWSC. All costs, expenses and liabilities arising from that escrow and incurred by the parties shall be paid by Claimants.
N. Claimants and Respondents shall pay the costs, expenses and liabilities incurred in the present arbitration including attorneys’ fees, as set forth in Annex 3 hereto.
O. The Tribunal respectfully requests the Courts of the relevant jurisdictions to enforce this final award.
DONE and ORDERED in Geneva, Switzerland, this 28th day of July, 2000.
Guilermo Gamba Posada}}
Original in English:
- The full text of the award has been posted on the Andersen Consulting Internet website and published in 15 Mealey's International Arbitration Report 2000, Issue 8, pp. A1-A45
M. J. BONELL, A ‘Global’ arbitration decided on the basis of the UNIDROIT Principles: In re Andersen Consulting Business Unit Member Firms v. Arthur Andersen Business Unit Member Firms and Andersen Worldwide Société Coopérative, in 17 Arbitration International (2001), p. 249 et seq.
F. BLASE, Proposing a New Road Map for an Old Minefield. The Determination of the Rules Governing the Substance of the Dispute in International Commercial Arbitration, in 20 Journal of International Arbitration (2003), p. 269 et seq.}}