Can witnesses in the course of an arbitral hearing be requested to testify on issues for which they were initially not offered by a party? At the outset, this appears to be a remote question but it has become a rather frequent practical problem which can have a significant impact on the outcome of an arbitration.
Here is a typical scenario, illustrated by an example: in a large post M&A dispute, the buyer = Claimant argues numerous breaches of reps & warranties obligations contained in the share purchase agreement (SPA). The seller counterclaims for payments under an “earn-out” clause stating that the seller should get 50 % of the target company’s profit in the financial year following the transaction, provided that such profit exceeds EUR 10 million. This is the initial “landscape” of the dispute. As the proceeding unfolds, the buyer argues a breach of the standard “accuracy of the target company’s financial statements” representation. To this end, the buyer offers the target company’s managing director as witness for the fact that a certain litigation risk was well-known to the managing board and thus should have been reported as a reserve in the balance sheet. A respective written witness statement is submitted, solely addressing the described topic. During his examination in the hearing, the managing director testifies along the lines of his witness statement. In cross-examination, opposing counsel suddenly addresses completely different issues relating to other sub-claims, namely whether the seller deliberately misinformed the buyer about certain facts (as argued by the buyer). Opposing counsel even addresses issues relating to his own counterclaims, namely whether the target company deliberately downplayed its financial performance to avoid payments under the earn-out clause. Claimant’s counsel protests vigorously against such questioning, yelling “outside the scope of the witness statement“. The arbitral tribunal deliberates the situation and finally allows the questions about the alleged intentional misinformation of the buyer, but rejects any questions relating to the seller’s counterclaims under the earn-out clause. However, when the tribunal’s questioning time comes, the tribunal asks the witness about the issues relating to the earn-out clause. Objections raised by the buyer are overruled on grounds of the tribunal’s “right to investigate the case”. The testifying managing director turns out to be the crucial witness on all three issues in question: first, he confirms the breach of the representation since the litigation risk was known prior to the transaction. Second, he rejects the buyer’s allegation that the seller deliberately misinformed the buyer at the outset of the transaction. And finally, the managing director confirms that, on the instruction of the new owner (= buyer), the target company delayed the performance of certain contracts to downplay its financial performance with the aim to avoid payments under the earn-out clause.
To cut a long story short: in this case, the buyer’s witness, i.e. the managing director, has done more harm than good to the buyer’s case due to the enlarged scope of testimony. By presenting this witness, the buyer has opened the proverbial Pandora’s Box. The resulting question is: Was justice done, and were the proceedings conducted properly?
It all started with Claimant’s decision to name the managing director as a witness and to submit his written witness statement. In this respect, it is clear that Claimant must not enlarge the scope of the offered testimony in the course of the arbitral hearing, i.e. when asking questions in the so-called direct testimony phase. Claimant is restricted to the testimony contained in the witness statement. The reason for this restriction is that the witness statement shall permit the opposing party (i) to decide which counter-witnesses, if any, should be named and (ii) to prepare for the cross-examination of the witness. Both objectives would be torpedoed if Claimant was allowed to surprise the opposing party and the arbitral tribunal by introducing factually new witness testimony in the course of the hearing. After all, it was Claimant’s choice not to offer a broader scope of testimony by asking the witness for a more extensive witness statement. This choice is binding and final. Accordingly, an arbitral tribunal must reject such attempt, latest upon opposing counsel’s objection “the testimony is outside the scope of the witness statement”. It may be permissible to add some details to the original topics of the testimony, but the introduction of new topics is certainly forbidden.
The situation becomes complicated if the party that tries to enlarge the scope of the testimony is not the party offering the witness, but the opposing party during cross-examination. At first sight, such attempt appears to be impermissible as well. The purpose of a cross-examination is to test the credibility of the testimony provided during direct examination, not to introduce new testimony. If the opposing party had wanted the witness to testify on its behalf, the opposing party could have nominated the witness itself. That might have been difficult because an opposing party has only limited “access” to a witness, but this is hardly a sufficient excuse. And the principle of equal treatment supports the idea that if Claimant is not permitted to enlarge the scope of testimony during direct examination, Respondent should be subject to the same restriction during cross-examination. However, neither institutional arbitration rules nor the IBA Rules on the Taking of Evidence provide any guidance on how to deal with this problem. And, rather surprisingly, this issue is discussed with different solutions in US-American procedural law where some states restrict cross-examination to the initial topic of the testimony while other states favor a “doors wide open” policy under which a party offering a witness opens the doors for the opposing party to question the witness on any desired topic.[1] The bottom-line is: while good reasons advocate for restricting cross-examination to the topics raised in the witness statement, arbitral tribunals hardly violate their procedural discretion if they allow broader questioning during cross-examination. Limits are probably reached if the cross-examination is used for questions supporting the cross-examiners own claims.
Finally, the questioning right of the arbitral tribunal itself can hardly be restricted to the topics of the original testimony, neither factually nor legally. Factually, a party is typically reluctant to object against the questioning of the tribunal, fearing that this will make the arbitral tribunal wonder about the motives of such objection. Is there anything the party wants to hide? And legally, many institutional rules provide the arbitral tribunal with the right to investigate the case[2] which – in combination with the general procedural discretion of the arbitral tribunal[3] – provides a rather strong basis to allow the arbitral tribunal to ask any question it likes.
What is the consequence of all this, and what is the resulting advice for counsel and arbitrators? First, offering a witness is a decision which can backfire, so the decision should be made after careful consideration. Second, to avoid surprises and unproductive discussions, the issue of a possible enlargement of a witness testimony should be addressed early in the proceedings. It does not harm to repeat the relevant rule from a procedural order that a party offering a witness must not enlarge the testimony beyond the scope of the written witness statement. And for the sake of predictability, it is advisable to agree or to order that also during cross-examination the questioning must stick to the topics addressed in the written witness statement while questions by the tribunal concerning any topic the arbitral tribunal considers of interest remain permissible. To restrict the questioning right of the tribunal one would need a strong indication in the applicable arbitral rules or in the arbitral law at the place of arbitration.
[1] Cp. Harbst, A Counsel’s Guide to Examining and Preparing Witnesses in International Arbitration (2015), pp. 107-109.
[2] Cp. Art. 25 ICC Arbitration Rules 2012.
[3] Cp. Art. 22 para. 2, Art. 26 para. 3 ICC Arbitration Rules 2012.
