As the number of international arbitrations has grown, so too have calls for a speedier and more cost-effective process. However, the apparatus of international arbitration remains strong in the face of criticism
International arbitration, with the twin props of the New York Convention and the Panama Convention, is the safety net above which the daredevils of cross-border business perform. Its integrity and proper functioning are fundamental. But as international arbitration has grown and evolved, so too have a few of its imperfections.
To some, arbitration is outshone by its history. David Goldberg, SJ Berwin’s head of international arbitration, does not share that view, but notes that: ‘Arbitration is far from its origins. In effect, it used to be a means of avoiding court-based litigation to ensure efficient resolution of disputes, quickly and cheaply, by men and women who understood something about the particular trade.’
But a recent study of Investment Centre for Settlement of Investment Disputes (ICSID) arbitrations highlights the shift. On average, the time period between filing a request for arbitration and the rendering of the final award is now just over three and a half years, and costs usually run into millions of dollars. For clients this is problematic, and reform has become a central preoccupation for the international arbitration community.
‘Costs and delays are causing a real problem for clients,’ says David W Rivkin, a litigation partner in Debevoise & Plimpton’s New York and London offices. Michael Davison, co-head of international arbitration at the newly merged Hogan Lovells, agrees: ‘If arbitration is going to deliver on its original promise, everyone involved has got to take advantage of how flexible arbitration is to make it as cost effective and efficient as possible. If they fail, ultimately, it will be taken into an area of disrepute.’
Catching costs
Among the most outspoken critics of the status quo is Andrew Clarke, chairman of the Corporate Counsel International Arbitration Group, and vice-president of the London Court of International Arbitration (LCIA) European Users’ Council. At the International Chamber of Commerce (ICC) Commission in 2009, Clarke took the opportunity to put the client’s perspective with a rhetorical question. ‘If I say “disputes of any real significance currently take anything from two to four years to prosecute and a further one to two years before the final award is rendered”, would that shock anyone?’ he asked. ‘If it doesn’t,’ he continued, ‘I can tell you that when I give this advice to my business colleagues they are absolutely shocked.’
These cases are, without doubt, slow and expensive, and for some the time involved is disproportionate. Not everyone agrees, however. Gary Born, chair of the international arbitration group at Wilmer Cutler Pickering Hale and Dorr, is more circumspect. ‘The time that’s appropriate for resolving a relatively low-value, one-off issue of fact is, correctly and necessarily, vastly different from the time that’s necessary to decide an investment dispute that will produce a public award that deals with matters of high public importance concerning questions of state sovereignty and foreign investors’ rights. In the latter case, you will be getting a decision that is looked to as giving an authoritative, or at least very persuasive, interpretation of rights and obligations under international public law.’
‘The civil law system is more interested in ending disputes in a reasonable way without finding out the absolute truth.’
Thomas Müller, Homburger
The appropriateness, or otherwise, of speeding up proceedings in a well-managed arbitration remains a moot point, but arbitrations are not universally well run. Multiple factors can and do delay arbitral proceedings, and the desirability of improving matters depends to a large extent on the protagonists. ‘Parties have the same approach they’ve always had,’ Fountain Court Chambers’ Bankim Thanki QC says. ‘The claimant will try to drive things on and the respondent will normally – though not always – try to slow down the process. It was ever thus.’
Respondents may wish to draw out proceedings simply to drive up costs for the claimant, or they may not have the cash flow in the business to meet the expense of an arbitral award. ‘When you’re dealing with huge amounts of money, the legal costs of sustaining litigation can be relatively small,’ says Peter Ashford, partner and head of commercial dispute resolution at Cripps Harries Hall. ‘It relates to the time-cost of money. Much depends on the cash flow and working capital requirements of the business. The company may be able to plan for that cash flow to go out of the business in five years’ time, but the relative benefits of keeping it in the business in the short term outweigh the costs of litigation. In those circumstances, lawyers may simply be told to fight.’
Slow fall
While these dynamics are common to disputes of all kinds, a further set of factors makes arbitration especially vulnerable to delays. ‘One of the problems you have as an arbitrator,’ Thanki QC says, ‘is that you don’t have the same mechanisms and tools for controlling the timetable that a Commercial Court judge would have. You don’t have all the superstructure of the Civil Procedure Rules that enables Commercial Court judges to try to move the process on.’
Daniele Favalli, an arbitration specialist at Swiss firm Vischer, concurs. ‘If the parties agree to stay proceedings or agree to grant each other more time, there isn’t a great deal even a seasoned tribunal can do. Even if the tribunal suspects one side is delaying the process unreasonably, any intervention could bring the tribunal into conflict with a party’s rightto be heard.’
‘Parties are pushing the envelope. They want more than interim measures, they want partial awards.’
Dan González, Hogan Lovells
How tribunals respond to procedural challenges varies. Judith Gill QC, head of Allen & Overy’s international arbitration group, says: ‘The flexibility that’s accorded under almost all sets of rules to the arbitral tribunal means that, subject to the parties agreeing how the arbitration is to proceed, the nature of the process is going to depend very heavily on what your tribunal thinks it should be. If you have arbitrators who are perhaps less familiar with current trends in international arbitration, it’s not unusual for them to default back to how things are done in their domestic jurisdiction.’
That may in itself not be a problem, but lack of consensus and lack of certainty can lead to paralysis. The clash of common and civil law legal cultures is seldom more evident than in international arbitration, and the two systems have substantially different approaches to time and cost. ‘I think the common law system is more aimed at going to the heart of a dispute and finding the truth, irrespective of time and expense,’ says Thomas Müller, head of Swiss firm Homburger’s dispute resolution group. ‘The civil law system is more interested in ending disputes in an efficient and reasonable way without finding out the absolute truth in each and every case. It’s more pragmatic.’
‘In the English system, arbitrators are discouraged from promoting settlement, as it’s seen as outside their role.’
Gary Born, Wilmer Cutler Pickering Hale and Dorr
Müller describes a recent arbitrationwith a US law firm on the other side, which arrived at a hearing with ‘an armada of 20 lawyers’, as compared to Homburger’s (‘already excessive’) six. ‘I found this mind-boggling,’he says. ‘Sometimes in arbitration hearings you could think you were in a US Federal Court.’
Mind the gap
Among the most significant differences between the two cultures is their approach to disclosure. Disclosure does not exist in civil law jurisdictions, but is commonplace in common law state courts. It has the potential to derail an arbitration, adding months or years to the length of proceedings. Worse still, from the perspective of trying to control time and cost, is e-disclosure. ‘It is potentially a nightmare,’ says Ray Werbicki, head of international dispute resolution at US firm Steptoe & Johnson. ‘You don’t really know what information is there. Even clients who are extremely organised in having kept electronic folders, knowing where things are stored, knowing who’s got e-mails from the relevant period that are likely to be relevant to proceedings, still face problems. Then you have to work with specialist IT consultants, and that just takes a very substantial amount of time.’
Werbicki notes that if you want to keep proceedings more brief and less costly, it’s easier to do so in arbitration. ‘Generally speaking, arbitrators don’t like disclosure, whereas if you’re here in England, or the US or Canada, courts don’t mind disclosure under the White Book,’ he says. ‘Even though the days of Peruvian Guano [the high-water mark in limitless disclosure] are supposed to be a long way behind us, you can still list and action huge numbers of documents that contain everything that anybody thought relevant, with not very much thought applied to whether it is. The courts generally allow it, because as long as there’s something that might be relevant they’d rather include it than exclude it.’
While no standard approach to disclosure exists in international arbitration, Gill QC says certain conventions are emerging. ‘Things like Redfern schedules have actually made the process of disputed document requests rather simpler for the tribunal to deal with, and over the last few years have become the norm,’ she says.
But there’s no perfect solution, as Thanki notes: ‘Increasingly in international arbitration, tribunals are preferring the IBA rules for disclosure, usually involving the use of Redfern schedules, where the party identifies the documents they want disclosure of in one column, in another column they supply the justification for seeking those documents, and then in another column the other side says whether they’re giving disclosure or the grounds on which they’re resisting – to which the asking party might reply. Then the arbitrator gives their adjudication.’
‘That whole process can take forever,’ Thanki QC says. ‘It was designed to restrict disclosure, and in a sense it is giving less disclosure, but it doesn’t mean that the time involved in the disclosure process is reduced. In fact, it can lengthen it.’
Stars of the show
Compared with litigation, in arbitration there is less certainty as to what parties will get from the process. ‘The key,’ Gill QC says, ‘is getting the right tribunal for the particular case, and I don’t think that can be underestimated. A very broad range of individuals sit as arbitrators, some of whom run cases very effectively, very efficiently, and others do the opposite.’
The arbitrator appointment process is marred by what Christopher Newmark, one of the younger generation of arbitrators and a dispute resolution partner at boutique litigation law firm Spenser Underhill Newmark, describes as ‘an excess of caution’. Whether or not the stakes are high, counsel usually opt for senior, experienced arbitrators. ‘One of the golden rules in selecting arbitrators,’ Newmark says, ‘is that you don’t select someone if you haven’t seen them perform before, or at least had a very reliable recommendation.’
The result is a paradox: the market only wants arbitrators who are too busy to manage their cases effectively. This sustains a highly inefficient market and one obvious corollary is over-trading.
Over-trading has become, and continues to be, a serious issue with direct implications for time and cost management in international arbitration. Born says: ‘When you take on an arbitration you have a contractual obligation, a professional obligation to the parties, and a personal obligation to the counsel that approaches you to do what you promise to do.’ He adds: ‘That is to progress the arbitration and render the award in the amount of time the parties say, or can reasonably be expected to do it. These obligations work in a fair number of cases.’
‘Redfern schedules have made the process of disputed document requests rather simpler for the tribunal to deal with.’
Judith Gill QC, Allen & Overy
Nevertheless, few in the field are entirely satisfied with their service from arbitrators. A recent initiative by the ICC now requires arbitrators to disclose to the institution how many ongoing cases they have before they are appointed to further cases. Counsel welcome such initiatives. SJ Berwin’s Goldberg says: ‘In my particular experience, on those occasions when arbitrations were unreasonably delayed, those individuals were appointed by the institution and not by the parties.’
Were market forces to prevail, overworked and therefore ineffective arbitrators would cease to be appointed, but the market has inadequate information on which to base such a judgement at present. Over-trading is a significant contributory factor to delays, and may be the principal reason why tribunals fail to read e-mails in advance of hearings, and fail to direct proceedings with sufficient clarity.
Timing it right
Related to over-trading and equally, if not more, frustrating, is tribunals’ untimely approach to rendering awards. Gill QC says: ‘A culture has developed that it is considered acceptable for awards not to be delivered for many months.’
‘Three months is now considered a relatively short period for rendering an award,’ she adds. ‘If I were to suggest anything to improve the system, it would be that we change the demands upon arbitrators such that three months is considered more as a maximum time within which an award should be delivered.’
It is not uncommon for clients to have to wait over a year for an award. ‘It’s an area where delays are most scandalous, frankly,’ Born says. ‘A tribunal has an obligation to deliver an award in a very timely fashion. Delays in the deliberation and drafting of the award are frankly pernicious, not just for reasons of cost and efficiency, but because the further the tribunal gets from the evidence and parties’ argument, the less good it’s going to do. It’s something that relates to the indecision of the chair of the tribunal and that is inexcusable, and an area where institutions should be careful.’
He adds: ‘If arbitrators or chairs perform that way in one case, then they shouldn’t be being appointed, particularly by the institution, in subsequent cases.’
Another dubious practice that the international arbitration community tolerates is arbitrators’ use of assistants and secretaries. It is an open secret that the awards issued by some leading arbitrators are, almost entirely, the work of juniors who may not have attended the hearings.
Gill QC, while recognising the legitimacy of arbitrators who use assistants for background research, or to produce a first draft of those parts of the award that recite procedural history, or summarise the facts, condemns the extension of this practice: ‘I am not convinced that it is widespread, but for my part I think it’s quite wrong if what they are doing is effectively making substantive determinations. When it comes to the reasoning of the award and the determination of the issues in a case it is totally unacceptable that that should be done by anyone other than a member of the tribunal who has actually sat through the evidence.’
Newmark has faith that over-trading and its attendant ills, and arbitrators’ laissez-faire approach to case management, will erode over time as the current generation of big-name arbitrators retires. ‘I think part of it is generational,’ he says. ‘I know some very good senior arbitrators whom I respect enormously for their ability to be judicial, fair and come up with very good awards, but who are not accustomed to being proactive in using techniques for moving arbitration along more efficiently and effectively. Younger arbitrators coming up will be much more willing to embrace those techniques, and that will help.’
Joining the party
While arbitrators have the authority necessary to direct proceedings to a timely and cost-effective conclusion, parties’ influence over proceedings can be very significant. While no one denies that client criticisms of the arbitral process have some force, a phrase oft-repeated among counsel is that, when it comes to timetables, ‘clients get what they deserve’.
According to Born: ‘In the vast majority of cases, timetables are constructed consensually between the parties, and in most cases the parties get substantially what they want. Parties choose, and choose very well advisedly, to take the correct amount of time.’
Clients don’t, however, always start with a clear view of what they require from counsel, and what is reasonable in terms of time and cost. ‘Clients are often very focused on costs at the front end when they’re looking at hourly rates and alternative billing practices,’ Gill QC says. ‘But when the case progresses, many will want, effectively, a “Rolls Royce” job, and that comes at a cost.’
‘It is pretty unusual,’ she adds, ‘to have a client say halfway through a proceeding that actually they’re quite happy for you to drop a part of the case or particular lines of argument in order to save costs. Once the matter develops, most general counsel want to do the very best they can by running whatever arguments are available, even if it means incurring the costs of adducing additional evidence.’
The cost of a ‘Rolls Royce’ job in an ICSID arbitration is usually millions, and occasionally tens of millions, of dollars. As CCIAG’s Clarke put to the ICC Commission: ‘Costs seem to be running at the sort of level historically seen for a major financing – perhaps $1.2m a year for external counsel – with the prospect of recovering only a part of that even if you are successful in the final award.’
‘I think every lawyer would publicly say that they would like to achieve the quickest result in the most cost-effective manner possible, but reality doesn’t seem to reflect that.’
David Goldberg, SJ Berwin
Of clients’ total costs in arbitrations, according to figures from the ICC, 82% goes on lawyer fees and expenses. The arbitrators’ fees and expenses amount to 16% of the total, and the administrative expenses of the ICC amount to 2%.
But as much as clients dislike the level of counsel fees, they keep paying them. ‘They could go elsewhere and spend less,’ Goldberg points out, ‘the level of fees is self-regulated.’
By and large, he says, the major commercial firms price themselves out of the smaller trade disputes, for which ‘the measure of efficiency is cost and speed’.
‘For very large cases, it’s not necessarily important,’ Goldberg notes. ‘I think every lawyer would publicly say that they would like to achieve the quickest result for their clients in the most cost-effective manner possible, but reality doesn’t seem to reflect that. It’s not because they’re bloody-minded and want to bill their clients as much as possible – the primary objective is to solve a client’s problems. Maybe you can cut down on witness evidence or documentary evidence, but sometimes it’s not in the best interests of the client.’
Born concurs: ‘In some parts of the arbitral proceedings, taking more time means you’re getting a better product. In many cases, it is the parties that choose to have 35 witnesses each and to put in hundreds of thousands of documents. When they do that it’s not because they’re confused or that the lawyers are greedily running up the clock, it’s because it’s a dispute that involves hundreds of millions or billions of euros and the parties believe that it is necessary to put those witnesses and that evidence in front of a tribunal. It is the parties that choose to do that.’
On the bounce
There are anomalies, however. International arbitration is intrinsically global, yet billing rates remain local, with rates in New York and London invariably higher than those in Paris and Geneva. Clients have the option to instruct counsel from other jurisdictions. Clients also commonly instruct full-service law firms where headline rates have historically been tied to M&A and banking work.
Clients have a right to exercise choice in appointing counsel. International arbitration is a buyers’ market, and, as Steptoe & Johnson’s Werbicki observes, clients are waking up to that fact. ‘Clients are asking lawyers to manage arbitrations and large-scale litigation more as a project, and in a more sophisticated way, so that there are more careful decisions taken about which personnel are going to be used, and how they are going to be charged. Clients are wanting more specific and more binding information on cost estimating, often in stages, and they often want caps and collars, and rewards and incentives, and the absence of rewards and disincentives as well.’
Matthew Coleman, a partner and solicitor advocate at Steptoe & Johnson, observes: ‘Costs, certainly in the investment treaty arbitration field, are becoming far more competitive. We’re now seeing a lot of firms agreeing to fixed fees, and when you look at some of the fees being charged, it really looks like a loss-leader.’
Others, too, have voiced scepticism as to whether a case can be managed effectively for the sums quoted. Nevertheless, when reviewing time and cost in litigation, counsel’s fees remain, as Newmark says, ‘the elephant in the room’. The UK has historically been slow to adopt creative or alternative billing structures, and the hourly rate remains the norm for arbitration in London.
But matters are evolving. The UK has seen greater use of third-party funding and after-the-event insurance in arbitration, and contingency fees appear to be on the rise. ‘I’ve seen contingency fees in the amount of 30% to 50% going to the lawyers,’ Coleman says, ‘which is obviously a crossover from the US litigation world.’
According to Werbicki, the Association of Corporate Counsel in the US is ‘very serious about alternative fee arrangements, and firms like ours are going to have to listen’. He says that UK firms have adopted a more traditional approach to alternative fees, which is to ‘resist it a bit, and continue on a conservative basis for as long as possible’.
Headline hourly rates, of course, are only part of the picture, and possibly a misleading part. Debevoise & Plimpton’s Rivkin says: ‘Clients’ costs aren’t based on the hourly rates they pay to lawyers like us, they’re based on how efficiently the case can be handled and the number of lawyers you have working on it.’
How firms manage cases varies substantially and clients are well advised to be vigilant. A widespread practice, for example, is the use of the same standard procedural order in all cases. The efficiency gains possible by exploiting the procedural flexibility of arbitration can deliver substantial savings in time and cost, but not everyone is motivated to experiment.
One exception is Rivkin. He describes a case in which his firm represented a political risk insurer in an expropriation claim. There were issues that would have to be decided about whether or not the events actually constituted an expropriation, which would have involved understanding the law of the country involved, and required legal experts. But the contract also said that any compensation in the event of an expropriation would be the net book value of the business at the date of expropriation.
‘The documents we had,’ Rivkin says, ‘showed that the net book value of this policyholder was negative at the time of the expropriation, so we convinced the arbitrator that instead of focusing on the liability issues – which would have taken a fair amount of time and cost – he ought to hold a hearing on whether or not the net book value was negative as we contended. If it was, it didn’t matter whether there was an expropriation. The arbitrator held a one-day hearing on that issue. He agreed with us and denied the claims on that basis.’
The ability to reorder proceedings to shorten them in this way is a significant advantage arbitration has over the courts. ‘If we were in court either in England or the US,’ Rivkin says, ‘and there was factual issue about the net book value you wouldn’t be able to get summary judgment, because there would have been a fact issue, and summary judgments are only used when there’s no dispute about facts.’
Steady footing
Dan González, co-director of Hogan Lovells’ international arbitration practice, says first-time users of international arbitration are often frustrated. ‘One of their frustrations with the process is that arbitration by definition works off of working towards a final award’, he explains. ‘That’s what you do. That’s what becomes enforceable, but US clients who are used to US litigation say: “Well, that’s going to take too long. I want some sort of pre-trial motions. I want a decision on a summary judgment basis because I think the other side’s case is all hogwash. I think we should be able to kick it out and you’re telling me it’s going to take two years?” And guess what? You’re now seeing the attempt to incorporate more motion practice in the form of interim measures.’
‘Parties are pushing the envelope,’ González adds. ‘They want more than interim measures, they want partial awards. They’re trying to bifurcate cases so that they have partial awards on various issues and that’s creating more complex issues for arbitrators to deal with.’
The success or otherwise of introducing interim measures depends both on the arbitrator’s willingness to entertain such novelties, and also on the client’s level of engagement with the process.
Where Gill QC believes that counsel probably can and should focus on trying to deliver better value is in tailoring the steps in the process. ‘It’s quite common that you will have a memorial, and it will be supported by all your factual and expert evidence, and they will often run to a hundred pages or more,’ she says. ‘There is a huge amount of work that goes into them. No question, that’s where law firms make a lot of money. We all have teams of people putting a huge amount of work in to put the best foot forward for the client in terms of their written submissions and preparation of evidence, including witness statements and the like. The clients themselves want and expect this from their lawyers, but we also have a responsibility to manage the process and ensure we focus on the real issues in the case.’
‘Younger arbitrators coming up will be much more willing to embrace new techniques, and that will help.’
Christopher Newmark, Spenser Underhill Newmark
Gill QC adds: ‘From my perspective, if I was given the job as in-house counsel of saying let’s improve efficiency, what I’d want to focus on is the extent to which that process can be looked at in a really efficient way – to say do we really need all these witness statements? Do we really need 30-page statements from each of them, or can this be dealt with in a more succinct manner? How many experts do we really need? Is the memorial putting forward the points that really matter or is it trying to include the kitchen sink?’’
This lack of refinement is also evident elsewhere. Another factor, highlighted by Anthony Charlton, managing director at FTI Consulting, is how late in the process damages are considered. According to Charlton, it is not uncommon for early estimates of claims to be overvalued, and on occasions undervalued, too. Lengthy and sometimes hostile battles over liability are conducted without an accurate estimate of the true loss. ‘Typically, a claim might be inflated by a factor of between 10% and 40%, or more,’ Charlton says, ‘but equally problematic are claims which, in strict finance and accounting terms, have no real evidentiary backing.’ Lengthy and sometimes hostile battles over liability are sometimes fought, which subsequently turn out to be unnecessary because there was no early and accurate estimate of the true loss.
Were such analysis to be conducted at the front end of a dispute, Charlton suggests, parties might be less likely to fight and more likely to settle. ‘A lot of issues are simply no longer relevant or have no value and can be dismissed,’ he says, ‘and this might allow parties to reach a settlement much quicker in the process.’ He adds: ‘It might be the case, in light of more accurate quantification of loss, that a full arbitration would not be necessary.’
Landing a settlement
A possible factor in excessive time and cost in arbitration is the discrepancy between settlement rates of cases before state courts and those in international arbitration. Newmark says: ‘Both research and the experience of practitioners that I have questioned suggests that the average settlement rate in arbitration proceedings is around 50%, whereas settlement rates in state courts are typically above 90%.’
This might, in part, be explained by the fact that commercial arbitration cases arise out of contractual disputes and businesses will have exhausted settlement options before going to arbitration. Nevertheless, were settlement rates closer to those of the courts, the cost and time savings to clients would be significant. Attitudes to settlement vary widely. Arbitrators from civil law jurisdictions – notably Switzerland and Germany – are much more comfortable with helping the parties settle their dispute by agreement.
Common law lawyers tend to be concerned that an arbitrator who expresses a provisional view on the merits of a case may be vulnerable to a challenge on lack of impartiality. ‘It’s a commonly held concern,’ Newmark says, ‘but there is little, if any, jurisprudence to suggest that it’s well-founded.’
According to González, around 10% of cases filed with the American Arbitration Association International Centre for Dispute Resolution are referred to mediation, and enjoy settlement rates of over 80%. Nevertheless, while tiered dispute resolution clauses are becoming commonplace, the mediation provision is regularly overlooked, or if undertaken simply done so as a box-ticking exercise. At present, there is little international consensus as to what a tribunal’s role should be in promoting settlement.
Born says: ‘In the English system, and to a lesser extent the US system, arbitrators are often discouraged from promoting settlement, as it’s seen as something outside their role, and as potentially involving them in something other than objective assessment of the parties’ adversarial position. In an ideal system, the ICC would be able to take the fact that arbitrators were permitted to and did facilitate settlement to the satisfaction of both parties, and in a sense penalise or reward a tribunal for having done so.’
He adds: ‘But that’s a really difficult judgement to make.’
International arbitration is, of course, full of difficult judgements: between arbitrator impartiality and proactivity, between civil and common law traditions, between the desire of the parties for speedier and cheaper dispute resolution and the time and cost involved in effective representation. These tensions require careful management, and in many instances receive it.
The idea that international arbitration requires reform may be overstated. International arbitration’s biggest problem is inconsistency, and while lapses may be understandable, they are not forgivable. LB