The fix – how to resolve the tensions at the heart of modern arbitration

With growing caseloads and global appeal, international arbitration is blossoming – as is criticism of rising costs and delays. As some practitioners develop tactics to ‘fix’ arbitration, will they do more harm than good?

It has taken 25 years since the end of the Cold War for states to fully embrace the notion of settling their disagreements through a third party, but as the recent and resolved case between Singapore and Malaysia shows, inter-state arbitration can be a powerful force in international relations. Similarly, large and sophisticated corporate consumers of dispute resolution services have developed a growing enthusiasm for arbitration when it comes to settling their disputes.

As Robert Volterra, founding partner at Volterra Fietta, comments, there has been ‘an enormous increase in appetite for arbitration as a general concept, and it’s no longer confined to investor-state cases. Even when there is no treaty forcing parties to go to arbitration, we are seeing a general surge in demand for effective ways in which parties can fulfil their commitment to the rule of law without submitting to a national court’.

In an age of globalised trade flows and investments this corresponding demand for a de-nationalised system of dispute resolution is now being seen outside of the traditional key hubs of London and Paris. Globally, there are ‘more and more commercial arbitrations of the type one would historically tend to see in European jurisdictions’, notes Craig Tevendale, partner at Herbert Smith Freehills. ‘It’s no longer purely treaty-based expropriation or thwarted-investor cases driving claim volumes. You see a lot more shareholder agreement cases where parties have simply fallen out.’

There has also been a notable growth in north African arbitration infrastructure, with new centres established in Casablanca and Cairo to cater to the boom in disputes, particularly around the energy sector. These, Tevendale says, reflect ‘an increasing sophistication of local counsel and a greater awareness of the power of arbitration to settle disputes’.

While the Arab Spring uprisings through the Middle East in 2011 have been touted as a substantial driver of new claims in treaty arbitration, Roland Ziadé, a Paris-based partner at Linklaters, notes that few of these cases have been directly related to political events. ‘There has been a period of uncertainty and therefore one naturally finds a surge in the number of parties trying to defend their rights, but most of these cases are not strictly related to the Arab Spring; they arise from the growth in popularity of arbitration globally. There is simply an increased awareness among Middle Eastern and north African parties, along with their counsel, of the possibilities of seeking remedies from the state.’

Likewise, the significance of sub-Saharan African arbitration as a driver of global caseloads may have been overstated, according to Mishcon de Reya partner Karel Daele. Pointing to his research into investor-state case volumes, Daele notes that arbitrations involving African parties account today for around 20% of all cases, a figure that has not changed in the past decade. While there are certainly more cases involving an African party, this reflects a global shift towards arbitration over national courts, rather than an Africa-specific trend.

A crisis of legitimacy?

While north and sub-Saharan Africa have emerged as new arbitration hotspots, the rise of investor-state cases in mature markets has been a clearer feature of the market in recent months. European states are now facing the types of arbitration that were until recently unheard of. This has been apparent in a spate of recent cases in which the energy policies of Spain, the Czech Republic, Germany and Austria – in particular in the reduction or removal of subsidies awarded to renewable energy – have been taken to international arbitration, adding to the growing tendency to paint investment treaties as a challenge to democratic legitimacy.

‘What these cases show,’ says Kaj Hobér of 3 Verulam Buildings, ‘is the collision or clash of cultures between EU law, in the most generic sense of the term, and public international law. The solar power cases are not the only ones where disputes have arisen because a state has taken a certain measure because they have felt, rightly or wrongly, an obligation to do so under EU law.’

While recent European cases may be driven by specific circumstances, negative publicity and mounting controversy surrounding investor-state arbitration – particularly in the ongoing debate over the Transatlantic Trade and Investment Partnership (TTIP), the looming EU/US trade deal with a powerful arbitral procedure built in – is damaging the reputation of arbitration in commercial contexts.

As Michael Schneider, founding partner of Lalive, says: ‘The risk is that justified concerns in this context will contaminate commercial arbitration. People are running treaty and commercial arbitration together in their minds and taking them for the same thing, but we must be very careful that there is not a spill-over in terms of regulatory power or institutions.’

Tevendale speaks for many when he reflects: ‘The biggest and most controversial subject in arbitration right now is definitely whether investment treaty arbitration is on the wane and legitimately under attack. States are either renouncing existing treaties or giving notice that they won’t enter into new treaties in future. More generally there is a risk that investment treaties will become discredited or disreputable. It’s not a major headache now, but it’s not inconceivable to say it might decline in future. For years the number of cases has increased year-on-year, but you can see a time in a generation from now when that trend is reversed.’

Such concerns have spurred attempts to reform the ‘system’ (the extent to which international arbitration can be considered as a system remains a moot point among arbitrators). As Daele notes: ‘The assumption made by critics of TTIP is that it’s secret, therefore the negotiators have something to hide, therefore it’s unfair. In response to this, you’re seeing people within the arbitration community attempt to counter these arguments by encouraging transparency.’

The most notable example of this move toward transparency in arbitration has been the United Nations Commission on International Trade Law (UNCITRAL)’s Rules on Transparency, signed in early 2014. However, Daele cautions, with increased transparency comes an increased risk of reputational damage to investors. ‘If submissions made to a trial become public then the press can write what they want from day one. It can take three or four years for a tribunal to clear your name, but the press has already noted the accusation and significantly damaged your reputation. I’ve seen it happen a few times in my cases.’

In spite of these institutional efforts to respond to the challenges of globalisation, the question arbitration veterans face is whether any particular forum or set of rules can encourage ethical behaviour. As recent leaks and wiretaps from the ongoing dispute between Croatia and Slovenia have underlined, unethical conduct can occur even within the most respectable arbitration forums. Drawing on his extensive experience of investor-state cases, Volterra points out that while ‘promoting transparency and high ethical standards is all well and good, in a shocking number of my cases I find the adverse party engaged in highly unethical behaviour. Forged documents and manufactured witness statements are not uncommon, even when the other side is represented by a top law firm’.

In a similar vein, Tevendale says transparency is ‘one of those magical concepts you can wheel out because it’s very difficult to publicly oppose, but the fact is people will take a tactical position that favours them. If appealing to the ethics of transparency can bring settlement pressure to bear on investors then you hand one side a massive advantage.’

Yet it is for precisely these reasons that John Gilbert, a partner at Pinsent Masons, sees UNCITRAL’s rules as a step in the right direction. He argues that large corporates are usually happy with transparency so long as the rules are not subject to change. ‘As an in-house lawyer, you want to be able to tell your people that there are rules about privacy and confidentiality and that you can run the dispute without risking leaks to the press. It comes as a nasty surprise if you think you’re involved in a dispute that is protected then there is a big push to open up the file.’

European arbitration institutions are also attempting to deal with these challenges by creating new rules and guidelines to regulate conduct. The London Court of International Arbitration (LCIA) issued new rules in October last year and is busy setting up outposts in a number of other jurisdictions. Perhaps the most ambitious recent proposal has come from the Swiss Arbitration Association (ASA), which has called for a global body to police standards in international arbitration hearings.

While few in the arbitration community doubt that the idea of applying minimum standards across the board could have benefits, many senior practitioners doubt change can be practically implemented. Notwithstanding the challenge of getting miscreants to voluntarily submit themselves to be pilloried by an unelected body outside their jurisdiction, there are more general concerns that the imposition of new rules may make arbitration less, not more, effective.

Yet Schneider, who was part of the Swiss delegation involved in preparing the UNCITRAL rules, argues that the ASA’s proposal has been misunderstood by its critics and that, far from introducing new side-line procedure, the aim is to simplify the regime by removing questions of counsel ethics from the arbitration to a parallel forum that cannot be used to delay or prejudice a case.

In the face of these new initiatives, many feel that more intrusive attempts at self-regulation could end up undermining the value of arbitration. As Steven Finizio, partner at Wilmer Cutler Pickering Hale and Dorr, points out: ‘Arbitration is facing a basic paradox of success. People like it more and more and therefore want to institutionalise it to protect its value. But as you institutionalise arbitration you end up destroying the things that made it work well in the first place.’

It is a point echoed by Ziadé, who comments: ‘There are now serious concerns among some clients about the efficiency of the process. New arbitration rules and guidelines have tried to improve the efficiency of the process but have not always had the desired impact, and in fact have sometimes led to more concerns over the judicialised and complexified nature of the process. Today the main reason for parties to opt for arbitration is, unfortunately, no longer really the speed or cost, but simply the neutrality of the forum.’

Gilbert, formerly of BP’s litigation group, shares this view, commenting on the ‘danger of new complexities to disrupt the efficiency of the process and remove some of its appeal. The main reason you go for arbitration as an in-house counsel is speed of result and cost, so anything that jams that system up is a big problem’. Yet, with a lack of credible alternatives – and the overwhelming attraction of forum neutrality that has become arbitration’s true selling point – claims of a decline seem unlikely. Much of what ails arbitration is becoming victim of its own success.

As Hobér observes, alternatives such as the Trade Commission’s proposal to create a world court for investment disputes are in no position to deal with global caseloads and, even in the long term, are highly unlikely to succeed. It seems, therefore, that the responsibility for smoothing over the growing number of creases visible in arbitration must fall on its practitioners. ‘There are clearly a large and increasing number of cases that do not run so smoothly, and it is a problem’, says Ziadé, ‘but the fault falls with all sides. The counsel, the parties, the tribunal and the institution. They all must do something to help expedite the process. No-one is immune from criticism here.’

james.wood@legalease.co.uk

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Further Reading: The International Arbitration Summit