Arbitration has become the primary method for settling international contract disputes. In 1996, the International Chamber of Commerce’s International Court of Arbitration in Paris received 433 new disputes. By 2006, the figure had risen to 593. A crucial advantage of arbitration, of course, is its enforceability around the world. Thanks to the widespread adoption of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards – the “New York Convention” that commits states to enforcing arbitral awards made elsewhere – arbitration awards can be enforced in over 140 countries. In addition, commercial arbitrations have the considerable advantage of confidentiality.
Another key to the success of arbitration has been its speed and affordability. Arbitration traditionally features strictly limited disclosure, and brief hearings of a few days or less. In the 1990s, companies embraced arbitration clauses in their contracts in a bid to reduce growing legal costs.
But as arbitration has grown, the cost and speed benefits have become less and less obvious. The use of techniques borrowed from litigation – substantial disclosure, procedural challenges and extensive use of expert witnesses – means arbitrations increasingly resemble court disputes.
“There’s a ‘litigisation’ of arbitration, with more and more techniques associated with litigation seeping in,” explains Lawrence Friedman of Cleary Gottlieb. “Ten years ago, pre-hearing document discovery was rare; now it’s standard. Traditionally, parties only put forward the documents they were going to rely on; now it’s usual to have document requests, although they’re still policed more carefully than in litigation.”
The impression that arbitration is cheaper and quicker than arbitration is rapidly dissipating. A recent survey by Dr Loukas Mistelis of Queen Mary University of London, the largest survey to date on the attitudes of in-house counsel to arbitration, found that most in-house counsel – 87% of those surveyed – believed arbitration was as or more expensive than litigation. “The cost and speed benefits of arbitration were oversold, and some false expectations were created,” says Eugene Gulland of Covington & Burling.
The result is that clients’ love affair with arbitration is beginning to cool down. “We’re seeing less enthusiasm from major corporations about arbitration,” admits Tim Portwood of Paris’ Bredin Prat. Indeed, cost and time were identified by in-house counsel in Dr Mistelis’ survey as the two biggest disadvantages of arbitration, with half citing cost as the primary disadvantage. “Cost and speed have been effectively neutralised as part of the appeal of arbitration,” admits Nigel Blackaby of Freshfields Bruckhaus Deringer. The disadvantages of the method – the finality of decisions, for example – are weighing more heavily on clients’ minds, as Lawrence Friedman notes. “Clients are asking, if I have to go through a discovery process anyway, is it worth giving up the right of appeal?”
Some suggest that concern over cost could retard arbitration’s growth. “Clients in my advisory practice are much less eager to put arbitration clauses in contracts,” admits Friedman. “I suspect we’ll see fewer contracts specifying arbitration over the next few years.”
The situation is made more serious by the growth of mediation. Of the in-house counsel surveyed by Dr Mistelis, 54% had been involved in arbitration, but 64% had experienced some form of ADR. “Mediation offers huge opportunity to be creative in resolving disputes,” notes Joseph Tirado, head of international arbitration at Norton Rose. “It has the potential to displace arbitration as parties’ first choice for international disputes.” Tirado set up an ADR group when he joined Norton Rose earlier this year.
In addition, reforms in many jurisdictions mean that litigation is back in vogue. Reforms of the US courts, for example, have reduced European clients’ concerns over litigating there. “In particular countries the courts have really got their act together, and we’re able to rely on them in a way we couldn’t before,” says Dominic Spenser Underhill of London boutique Spenser Underhill Newmark. “We have clients now saying: ‘Let’s look again at state courts.’”
The Causes of Complexity
In part, the growing complexity of arbitrations is a sign of the method’s success. Arbitration is being used to settle increasingly complex disputes. The American Lawyer’s first biannual survey of arbitration in 2003 listed 17 ongoing or recently resolved arbitrations worth over $1 billion. In its latest survey, for 2007, there are 63. The world’s largest commercial arbitration, regarding YUKOS’ doomed takeover of rival Sibneft, has total stakes of around $28 billion. Arbitration has hit the heights of the world’s largest disputes, and complex procedures and high costs are an inevitable and, most argue, appropriate consequence.
“We’re in a time of incredibly intense economic exchange,” says Dr Christoph Liebscher of Vienna’s Wolf Theiss. “People look back to the good old days, but these were rather straightforward cases, not complex, multi-party, multi-jurisdictional joint-venture disputes.”
And yet, the majority of arbitrations are low-value. In 2006, 45% of cases administered by the ICC Court were worth less than $1 million. In these disputes, disclosure and even hearings might not be necessary. So why do even low-value disputes become burdened with unnecessary procedures?
To many observers, it’s simply a question of habit. As arbitration has developed, it has become bogged down by custom. “We’ve seen more and more standardisation of procedures,” observes arbitration doyen Yves Derains of Paris boutique Derains & Associés. “Arbitrations are less and less tailor-made. Certain procedures are known by everybody and re-used inappropriately, and often parties are spending more than they need to.”
Derains believes a new broom is needed to minimise waste. “Parties need to sit down at the start of a case and decide how it’s going to be done. The procedures need some fresh air.”
Others blame the increasing number of arbitration practitioners with litigation backgrounds, a side-effect of the interest in arbitration shown by large international firms. “Many US firms are excited about international arbitration. It gives them a chance to export their dispute expertise globally the way they have their corporate and project expertise,” notes Dr Liebscher. “It’s their litigators who carry out the work, and they bring their backpack of litigation concepts, like discovery.”
Joseph Tirado, who joined Norton Rose this year from Baker Botts, agrees. “You see far more challenges to arbitrators now than several years ago, often for tactical reasons. People are prepared to take points they never used to,” he notes. “It’s easy to bring the sins of litigation into an arbitration. It’s hard to get people to think more creatively – do we need a hearing? Can we do it by telephone?”
Some observers single out US and UK-qualified litigators as particularly to blame. “I refused to be a chairman in a dispute with two English solicitors yesterday, because they both told me the hearing would last five weeks,” one Paris practitioner told me. “A typical continental hearing would normally last just a couple of days. The English conception is that you must argue every possible point.” Americans, whose litigation system features higher levels of disclosure than in the UK, “are even worse.” One Australian practitioner concurred: “The cost of an arbitration depends largely on whether there’s US counsel involved.”
Turning Back the Tide
As client concern has grown, the arbitration community has taken steps to combat rising costs. The ICC appointed a commission, chaired by Yves Derains and Chris Newmark of Spenser Underhill Newmark, to investigate techniques for reducing the cost and length of arbitrations. The resulting 22-page report outlines a host of suggestions, ranging from the obvious – “consider appointing counsel with the skills necessary for handling the arbitration at hand” – to the more invasive, such as considering limiting the length of written submissions and the duration of hearings. “The report listens to and acts on suggestions made by users of the arbitration system all over the world,” notes Newmark.
But will it work? Most or all of the ICC’s proposals seem practical on paper. But it’s easy to see a determined counsel taking umbrage at some suggestions. For example, the report encourages parties to set out the full details of their case in their initial claim or reply form. How many lawyers will confidently suggest to clients that they should put forward their entire case at the beginning of the dispute?
“The ICC proposals seem reasonable in the abstract, but in practice people fight and squabble over everything,” notes Tirado. “It can be difficult suggesting, for example, having a single arbitrator instead of the typical three-member panel – despite the obvious cost benefit – in case it is seen as an impression of weakness.”
It is tribunals, practitioners argue, who must push for simpler procedures. “Tribunals can help tremendously by suggesting measures themselves – it enables parties to discuss the idea without one having to make the first move,” explains Tirado.
Tribunals have a huge amount of power to narrow the scope of discussion in disputes, argues Eugene Gulland. “In any dispute there are issues which, even if proven in fact, wouldn’t have an effect in law,” he explains. “Arbitrators need to be more willing to make preliminary rulings on these issues, weeding out points that won’t benefit from a full discussion.”
Of course, as they are hired by the parties, arbitrators have a limited authority to push them into procedures they are uncomfortable with. But there is one significant weapon in their arsenal – costs. Tribunals generally have complete discretion over costs awards, and the ICC report encourages arbitrators to specify at the beginning of disputes that their allocations will take account of unreasonable document requests, excessive cross-examination, and so on. “The allocation of costs can provide a useful tool to encourage efficient behaviour,” it explains.
Nevertheless, many observers doubt that arbitrators will stand up to pressure from parties to allow litigation-style tactics. “The powers tribunals need are in their hands, but there’s a reluctance to use them,” argues Eugene Gulland.
To Dominic Spenser Underhill, “a successful arbitration depends as much on the tribunal as the lawyers. Where the procedure is proving too costly and elaborate, the tribunal must share the blame with the lawyers. Arbitrators have enormous powers to control cost and effort and they must use them, more than some of them do at present.” In part this is because most arbitrators also work frequently as counsel. It’s no wonder arbitrators aren’t aggressive in pushing against practices that they may have employed enthusiastically as counsel.
Some caution from arbitrators is appropriate. Most arbitral rules, including those of the ICC, require arbitrators to decide awards in the fastest time possible that allows for both parties to have a reasonable chance to present their case. An arbitrator that pushes too hard for limitations runs the risk of one party appealing the award to the courts. “Arbitrators face a difficult task of balancing efficiency with the duty to let both sides put forward their case,” explains Gulland.
But many arbitrators have become unnecessarily risk-averse. “In arbitration-unfriendly venues, it’s necessary to be cautious,” says Dominic Spenser Underhill. “But in jurisdictions with well-developed courts, like the most common arbitration venues, successful challenges to arbitration awards are few and far between. In general, arbitrators are being more cautious than they need to be.”
Cutting out the Middleman
Unable to rely on arbitrators alone to stem the bloating of arbitrations, the ICC suggests turning to a perhaps surprising resource: the clients. The report encourages parties to bring clients to an early procedural conference, and authorises tribunals to request their attendance. Clients, it believes, will often take a more conservative approach than battle-hungry dispute lawyers.
It’s an idea endorsed by many practitioners. “As an arbitrator, I think it’s definitely best to talk to clients, and find out what they wish to achieve from the arbitration,” says Marko Hentunen of Finland’s Castrén & Snellman. “You may find they are very eager to conclude the matter quickly and affordably, or you may find their priority is to ensure every detail of their case is heard. It is their dispute, and theirmoney – it’s appropriate that they should decide.”
But other observers argue that clients are themselves part of the problem. Pierre Mayer, formerly of Coudert Brothers and Clifford Chance, recently joined the growing Paris international arbitration team of Dechert. “In-house counsel commonly complain about the length and expense of arbitrations, but they are not entirely consistent,” he argues. “When a client sees an advantage in making every point as fully as they can, even if it’s going to add to the cost and length of the dispute, they won’t hesitate.”
Indeed, clients also express frustration that arbitration doesn’t give them enough chance to put their case forward. “Clients are increasingly complaining that arbitration has a built-in bias towards compromise,” notes Lawrence Friedman. “Sometimes neither side feels it has had the chance to really put its case across.” Further steps to simplify procedures risk exacerbating this concern.
Much ado about Nothing?
Amidst the doom-mongering, observers are quick to point out that concern over costs and duration isn’t new. “There’s always worry over costs in any area of legal practice,” notes Balz Gross of Zürich’s Homburger. “I’m not sure this is new, and it certainly isn’t limited to arbitration. And it hasn’t stopped the number of arbitrations from growing.”
While litigation may have improved in many jurisdictions, Gross argues, enforcement issues are still rampant in much of the world. “If your contract is within the EU – where the Brussels Convention assists in enforcement of judgments, and where there is more and more a common standard of court practice – it’s becoming more acceptable to use foreign courts, at least the courts of certain jurisdictions. But if you’re dealing with Asia, Eastern Europe or the USA, then there’s really no alternative to arbitration.” Dr Mistelis’ survey provides cause for calm, with 95% of inhouse counsel surveyed saying they intended to keep using arbitration.
Looking Forward
Still, complacency should be avoided. Flexibility is key to the appeal of arbitration and, according to Dr Mistelis’ survey, the number-one advantage of the method in the eyes of in-house counsel. Greater flexibility over procedures, rather than a narrow focus on simplification, is needed. “If your claim is for $400 million, then you can’t do it on the cheap, and frankly it doesn’t matter if it takes two years,” says Nigel Blackaby of Freshfields Bruckhaus Deringer. “But if it’s worth $2 million, then you’ve got to find a quick, workable solution.”
But will the arbitration community succeed in shaking up practices that have become fixed? Fernando Mantilla-Serrano, of Shearman and Sterling, is optimistic. “As the arbitration Bar matures, more and more people will specialise in the area,” he predicts. “They’ll come to realise that they can’t just transfer litigation tactics over to arbitration. And there will be more experienced arbitrators who won’t let themselves be pushed around by counsel.”
But others feel more radical changes may be needed. “The ICC report feels like rearranging the deckchairs,” argues Joseph Tirado. “Perhaps we need a more fundamental rethink of the rules. Some specialist shipping arbitration institutions don’t allow hearings for claims below a certain level, for example. It’s a crude measure, but it may be more effective than simply urging arbitrators to be more interventionist, or adopt a more active case management role.
“The focus of arbitration should be the resolution of a dispute, rather than the process itself,” Tirado points out. It’s a lesson the arbitration community must remind itself of if the discipline is to have a bright future.
“Techniques for Controlling Time and Costs in Arbitration” was published in the ICC International Court of Arbitration Bulletin, Volume 18 N°1 – 2007, or can be downloaded from www.iccwbo.org/court/arbitration/
“International Arbitration – Corporate Attitudes and Practices,” by Dr Loukas Mistelis, was published in The American Review of International Arbitration [2004] 15, pp. 525-593. A simplified version is available from www.pwc.com/arbitrationstudy/