Controlling time and costs in arbitration

A major challenge to international arbitration is the perception by corporate and in-house counsel that this process has grown to be time-consuming and costly. A recent survey by the Corporate Counsel International Arbitration Group (“CCIAG survey”) found overwhelming agreement with 100% of the respondents agreeing that it took too long (56% of respondents strongly agree) and cost too much (69% of respondents strongly agree).

But how true is this and what might be the reasons for the extensive and costly process?

Arbitration delays

A study on corporate attitudes to international arbitration, by the Queen Mary School of International Arbitration (“Queen Mary School study”), found that concern over excessive delay led 17% of corporations polled to opt for a pre-award settlement.

A survey commissioned by The Chartered Institute of Arbitrators to examine these complaints reported that an average arbitration will take 17 to 20 months to conclude which means that in some jurisdictions litigation (to which arbitration was meant to be an alternative) offers speedier relief.

Commentators blame the introduction of adversarial practices with lawyer-arbitrators duplicating the litigation process instead of adopting simpler methods within the arbitral process, resulting in arbitration becoming as lengthy as litigation. Other commentators have gone further, describing arbitration as too cumbersome, too expensive and too legalistic – in short, contaminated by the habits of court litigation, thereby pushing parties to reconsider litigation or settlement.

Corporate counsel have also criticised Chairs for being overscheduled, unprepared, disorganised, timid and slow. In the CCIAG survey, parties cited these causes of delays:-arbitrator unavailability and excessive document disclosure (100% of those surveyed agreed);tribunals failing to narrow issues, and restrict evidence and parties’ or counsel’s arguments (95% agreement); and prioritising concern for due process over efficiency resulting in a free-for-all on timing (90% agreement).

Parties to an international arbitration generally incur costs such as administrative fees and expenses of the tribunal, external counsel, experts and for specialist services (e.g. transcribers and interpreters), hire of hearing room and facilities, witness expenses and internal costs.

The CCIAG survey found these costs in aggregate to be substantial compared with the actual quantum in dispute. In the Queen Mary School study, 23% of those surveyed were motivated to attempt a pre-award settlement to avoid high costs.

Comparisons between arbitration and litigation

As far back as 1978, an English judge described arbitration as “long and tedious”, comparing it unfavourably with a court’s summary powers, Ellis Mechanical Services Ltd v Wates Construction Ltd [1978] 1 Lloyd's Rep 33. In contrast, several commonwealth jurisdictions have revamped civil procedural rules, focusing strongly on:-case management for strict timetables, proportionate disclosure and expert evidence; and controlling costs by focusing on key issues and limiting the amount of work required for each case.

In Singapore, cases can conclude in less than fifteen months and sometimes within nine months by:-rigorous judge-led case management (through pre-trial conferences, inviolable trial dates, peremptory “unless” orders); and strong use of information technology.

Responses by arbitral parties

Calls for suitably experienced arbitrators, procedural calendar

To avoid poor case and process management, in-house and corporate counsel actively select suitably experienced arbitrators. These arbitrators are able to pro-actively manage the process and discourage procedural excesses, such as: unnecessary expert reports;

Other strategies

The more creative strategies employed to contain arbitration’s excesses have attendant downsides:-

Careful drafting to avoid cost and delay: this requires foreknowledge of the nature of the future disputes. Given the numerous contracts executed each year by a major corporation, its general counsel may find this unworkable in practice. Additionally, certain disputes are so commercially important that costs and delay pale in comparison to the goal of winning.

Early settlement: this works on the assumption that avoiding the transaction costs of arbitration motivates parties to settle early, although this may not be the most cost effective solution.

Scrupulous oversight of external counsel: policing counsel by monitoring the number of hours and evaluating their tactics are premised on the lack of trust in the counsel to act in the best interest of the client.

Third party funding: a fund offers to finance counsel’s fees and tribunal’s costs for parties who cannot afford to pursue their claim or for those who are exposed to multiple ongoing claims. In return, the fund shares a portion of the award. However, some jurisdictions consider this to be ethically against public policy, or even illegal.

Calderbank letters: most civil procedure rules require the loser to pay all the costs of the court proceedings and a reasonable proportion of the winner’s costs. Facing the prospect of losing its case and concerned over high litigation costs, a party may choose to tender a “sealed offer” on a without prejudice basis. The losing party thus succeeds in capping its potential costs liability if the winner subsequently fails to beat the loser’s sealed offer (that is, the winner would have received the same or more if it had earlier accepted the loser’s offer). To employ this mechanism in an arbitration however requires the tribunal to bifurcate the award: the tribunal has to agree to first deal with the substantive claim in an interim award and then later address costs issues in its final award. In accepting a sealed offer, the tribunal may also open itself to claims that it had prior knowledge of what could amount to an offer of compromise by one party to another.

Responses by arbitral centres

Arbitration centres and chambers of commerce have begun to address this negative perception by amending their arbitral rules:-

In Singapore, the latest edition of the Singapore International Arbitration Centre rules has expedited proceedings, equalised the parties’ positions and provided them recourse to more interim and emergency relief and given the tribunal new powers to facilitate more effective and efficient arbitration.

The International Chamber of Commerce has also amended its rules towards arbitral efficiency via early case management and proactive case management. The new rules will require parties and tribunals to make every effort to conduct proceedings in an expeditious and cost-effective manner, or run the risk of costs awarded against a party for its conduct. Parties are obliged to conduct proportionate arbitration and avoid intensive litigation, especially in a case where the sum disputed is large and expert litigators are hired.

To tackle the issue of evidentiary excesses, the International Bar Association revised its Taking of Evidence in International Arbitration Rules in 2010 to require parties to act in good faith, and allows the tribunal to penalise a party violating this principle by a cost order.

The success of these initiatives in changing the perception of corporate and in-house counsel can be seen in the statistics. In Singapore, the number of cases handled by the Singapore International Arbitration Centre (SIAC) has tripled to 188 cases in 2011 compared to ten years ago. For the first five months of 2012, the SIAC has handled 118 new cases, cumulatively valued at nearly S$2 billion.