Commercial arbitration is conceptually similar to litigation – an appointed neutral finds facts from evidence, applies the relevant law to those facts and imposes on the parties a legally binding determination of their legal rights and obligations. Yet arbitration also offers the parties significant potential advantages over litigation – input into the choice of decision- maker, customized procedure (perhaps including limited document disclosure), confidentiality, limited rights of appeal, speed and cost effectiveness.
But all too frequently those potential advantages are squandered. We've all heard the horror stories of arbitrations that were more complex, took longer and cost more than litigation would have. They were really just expensive "private litigation". Why? In many cases the parties did not understand that arbitration's advantages are not automatic. Parties need to appreciate that, despite conceptual similarities, arbitration procedure can be very different from litigation if the parties (and their counsel) are aware of the potential advantages and implement them in the procedure adopted.
Private litigation may be exactly what the parties want. It has its place. But for those who want to realize the potential advantages of arbitration, we provide below some tips about how, in both drafting arbitration agreements and conducting arbitrations, to actually do that. They apply equally to domestic and international commercial arbitrations. These tips fall into the following categories:
- Arbitration Design Considerations
- Pre-conditions to Arbitration
- Scope of Disputes to be Arbitrated
- Number of Arbitrators
- Procedural Rules
- Administered versus Ad Hoc
- Seat of Arbitration
- Conducting the Arbitration
- Engage Experienced Arbitration Counsel
- Choose Experienced Arbitrators
- Make a Schedule Early and Try to Stick to It
- The Less Involved the Tribunal, the Better
- Focus Document Requests on Material Items
- Keep Experts to a Minimum
- Avoid a Run-Away Tribunal
II. ARBITRATION DESIGN CONSIDERATIONS
An arbitration agreement, whether embedded in an existing contract or a stand-alone submission to arbitration, is itself a contract. It is a separate contract from whatever contract may have given rise to the dispute itself. It carries with it all the usual contractual issues of interpretation, performance and breach.
A) Pre-conditions to Arbitration are Potentially Dangerous
It is common for commercial contracts to require "tiered" dispute resolution procedures, beginning with negotiation, continuing through mediation and culminating in arbitration if necessary. The benefits of such an approach, principally resolving disputes as consensually and with as little outside intervention as possible, are obvious.
However, there are also drawbacks. Such a process can be superfluous. Generally speaking, if the parties want to settle, they will, whether or not they are required by an agreement to try. And if they don't, they won't, and there is no real benefit to requiring them to go through the motions before having their dispute resolved by arbitration. Requiring the parties to negotiate and mediate before arbitrating can cause delay and expense, unnecessarily if there's no prospect of settling.
Such a process may also introduce unnecessary uncertainty, potentially affecting the validity of the entire proceeding. For example, the language creating the process will likely refer to the parties negotiating in "good faith" or using their "best efforts" to resolve the dispute by mediation. The meaning of those phrases is far from clear. A party wishing to stall, or derail, an arbitration proceeding could take the position that the other party has not met those requirements and therefore that the claims are not yet admissible or the arbitrator has no jurisdiction. Resolving such challenges often requires considerable time and expense. Although the arbitrator could make a preliminary ruling, such a decision may be subject to review by a competent court. In any event, the issue might not practically be finally resolved, in court, until it came time to enforce the arbitral award.
In addition, because court proceedings are generally public, having to resolve any arbitration-related issue in court would likely nullify one of the important potential advantages of arbitration: confidentiality.
Because of those potential drawbacks, the parties should consider conditions precedent for arbitration, such as tiered dispute resolution processes, very carefully. They can be designed to minimize these problems, but that requires considerable care, by experienced counsel.
B) Scope of Disputes to be Arbitrated
In the commercial context this issue often arises in terms of whether the disputes to be submitted to arbitration are limited to claims of breach of a particular contract or extend to all claims arising from a business relationship, including things like tort claims.
It's crucial to understand that, unlike a court, an arbitrator has only the jurisdiction the parties to the arbitration agreement agree to give him or her. When the parties define the scope of the issues to be arbitrated, they define their arbitrator's jurisdiction. If they use narrow language, the arbitrator may not have jurisdiction to deal with important aspects of their relationship. The parties may find themselves in the unenviable position of having to arbitrate and litigate aspects of their situation at the same time. That would negate most of the potential advantages of arbitration.
If the parties define the scope of issues to be arbitrated in uncertain language, they invite more preliminary objections to the jurisdiction of the arbitrator. Those may, again, have to be resolved in court, with the delay, expense, uncertainty and breach of confidentiality described above.
To avoid these difficulties the parties should consider carefully the kinds of disputes which might arise from their relationship, make conscious decisions about which they wish to arbitrate and reflect those decisions in appropriate language. Generally, it is preferable to use more comprehensive, rather than more limiting, language. The parties should avoid the risk and expense of having to both arbitrate and litigate a dispute. But, if there is a good reason to limit the scope of disputes to be arbitrated, that limitation should be stated in the clearest possible language.
C) Number of Arbitrators
Arbitrations are usually adjudicated by a single arbitrator or a panel of three. The applicable arbitration legislation or procedural rules will likely provide the default of a single arbitrator. But it is always preferable for the parties to state the number of arbitrators they wish to use.
Different factors should be considered to decide which is most appropriate: a single arbitrator or a panel of three. These factors include: the amount in dispute (if it is a nominal amount, the extra cost associated with having a panel of three may not be justified) and the complexity of the dispute. With a panel the parties gain the benefit of three minds considering their respective issues as opposed to one. Generally each party will appoint one arbitrator, and they, in turn, then appoint a chair. The parties' appointments can reflect their views about the arbitrators' desirable background and experience (which could also be reflected if the parties are able to agree to a single arbitrator). A panel permits a blend of experience, for example a chair with legal and arbitral experience, and arbitrators with relevant technical, business or cultural background.
One of the potential advantages of arbitration over litigation is that the parties have at least some input into the choice of their decision maker. To realize this advantage the parties should consider the qualifications of their arbitrator(s).
Generally, arbitrators are required to be "independent" and "impartial". Independence requires that arbitrators not have a financial, professional or personal connection with any of the parties. Impartiality requires that they have an open mind about the parties and the issues. Such requirements are likely in the legislation or rules governing the arbitration. If not, the parties should ensure they address them.
Arbitrators should have legal and arbitral training. Arbitration is an adversarial legal process. Except in extraordinary circumstances, arbitrators are required to find facts from the evidence introduced before them and apply the relevant law to them. They may not adjudicate based on their perceptions of fairness, or their own experience or expertise, unless specifically given the ability to do so by the parties agreement. Arbitrating a dispute therefore normally requires experience in dealing with evidence, and other legal procedural matters, and knowledge of the relevant law.
Most often, parties are best served by arbitrators experienced in arbitration practice and procedure, rather than arbitrators with specific business, technical or scientific experience. If necessary, parties can always adduce the opinion evidence of qualified experts to educate the tribunal. The parties should also bear in mind that many procedural rules permit arbitrators to appoint independent experts to advise them, if necessary, which may be particularly useful in technology-related disputes.
If the parties do not agree on an arbitrator, the applicable arbitration legislation or rules will likely provide a mechanism for their appointment. The institutions involved normally recognize the importance of legal and arbitral experience. Nonetheless, the parties should consider whether their particular circumstance warrants specifying such qualifications in their arbitration agreement: the norm is that such specificity is not necessary.
E) Procedural Rules
The parties should choose a set of procedural rules to govern the arbitration. There are several sets of rules, drafted by Canadian and international arbitral institutions. The parties are also free to agree to modify any of those rules or to draft their own from scratch. Likely the best way to proceed is to adopt a tested set of rules from an arbitral institution, and agree on any modifications required by the nature of the particular dispute.
If the parties want to adopt rules, they should consider whether to adopt rules set in time (such as the "2007" version) or to adopt those rules as they may be amended at the time that the arbitration is commenced. Rules can obviously change dramatically over time. The changes may simplify the process or remove key elements that the parties like.
It is in this area, designing the procedural rules for the arbitration, that many of the potential benefits of arbitration can be realized. When considering what rules to adopt, the parties should consider issues like:
- Should they require pleadings, and if so how minimal or elaborate should they be?
- What should be the scope of any required disclosure of documents?
- Should there be any form of pre-hearing "examination for discovery"?
- What should be the procedural timeframes leading to the hearing?
- Should the evidence of witnesses be given by statement and cross-examination, rather than by viva voce testimony?
- Should the tribunal be required to deliver its award within a specified time?
- Should the parties' rights to seek judicial intervention in the arbitration, and to appeal the award, be limited?
It is obvious from this list that the nitty gritty of arbitral procedure can differ significantly from litigation. That is precisely the point. In arbitration the parties have the freedom to custom design a process which incorporates only what is essential to fairly resolve their particular dispute, and so to realize the potential benefits of arbitration. They should use that freedom.
F) Administered versus Ad Hoc
Another choice the parties should make is whether their arbitration is to be administered by an arbitral institution or ad hoc. Arbitral institutions offer administrative services for a fee. Usually their procedural rules assume the parties will use them. They usually include acting as a registry for the filing of "pleadings", assisting in the appointment of arbitrators if necessary, preliminary consideration of challenges to the independence or impartiality of arbitrators, arranging for deposits to secure the payment of the arbitrator's fees, formally issuing the arbitrator's award, and the like. Some require that all communications between the parties and the arbitrator flow through them. Others provide a level of scrutiny of the arbitrator's award before it can be issued.
The parties should consider whether those services are worth their cost. For a factually or legally complex dispute, or one involving a large amount of money, they may well be. For simpler disputes, they may not. The economics of a dispute involving a relatively small amount may simply make them unaffordable. However, the parties should also remember that if the arbitration is to be ad hoc, the arbitrator (who they must pay) will have to administer the arbitration themselves. Therefore, given the usual hourly rates of arbitrators, the cost of an institutions administration may not be prohibitive.
The parties must also remember that, even if their arbitration is to be ad hoc, they should still choose procedural rules. There are rules suitable to ad hoc arbitrations, such as the UNCITRAL Arbitration Rules. Another option is to amend an institution's rules to delete references to that institution administering the arbitration, but counsel must be very cautious in doing so, lest any ambiguity be imported into the adopted rules.
If the arbitration is to be administered, the arbitration agreement should identify the administering institution and clearly state that it will have that responsibility.
If preservation of the parties' confidentiality is an important potential benefit, the parties should carefully consider how to realize it. The applicable arbitral legislation and rules should deal with confidentiality to some extent. Corporate or securities laws governing the parties may inform the extent of the confidentiality that can be maintained. The parties should consider whether their arbitration agreement should incorporate a detailed confidentiality agreement to deal with the issue further. Likewise, they should consider, in appropriate circumstances, whether they should have to agree on public statements about the arbitration, such as press releases.
Parties should note that confidentiality may be lost depending on whether the arbitral award is challenged or enforced. Again, if the courts are involved, they are generally public.
H) Seat of Arbitration
Choosing the "seat" of arbitration is crucial. The seat of arbitration is where the arbitration is notionally, legally, held, not where its hearings may be physically held. It is crucial because the laws of that place will govern the arbitration; those laws will be the "applicable arbitration legislation" we have referred to.
In addition, if it is necessary for the parties to seek recourse to the courts during the arbitration, then the courts of the seat are competent to assist them. A party may also try to seek interim relief in the courts of the jurisdiction of the party to be enjoined. Depending on where the parties' counsel are authorized to practice, they may have to engage local counsel to exercise those rights.
The parties can also agree on a venue for the hearings (if hearings are even physically held in any one place, in this age of video conferencing) that may be different from the seat. But it may be better to leave that until the arbitrators (and their residences) are known. It is also important to consider whether the venue of the hearing permits foreign counsel to appear there in an arbitration. In some places, like California, the issue is not clear.
III. CONDUCTING THE ARBITRATION
Drafting a thoughtful arbitration clause or agreement that deals with all these issues is vital if the potential benefits of arbitration are to be realized. But it is not enough. Realizing those benefits also depends on how the arbitration is actually conducted. Here are some specific suggestions for how to conduct an arbitration to realize its potential benefits.
A) Engage Experienced Arbitration Counsel
Counsel who can think outside the litigation "box", who are comfortable with the different arbitration processes and who are able to make that process work, will help parties to realize the potential benefits of arbitration. Counsel who are very experienced litigators but cannot adapt to arbitration's different process, and so conduct the arbitration just as though it were litigation, minimize that potential. For example, one of the authors, when acting as arbitrator in a commercial dispute, encountered counsel who treated the arbitration as private litigation: presenting issue pleadings, disclosing and demanding all relevant documents and conducting fulsome examinations for discovery. Few of arbitration's potential advantages were realized in that arbitration, because of the approach of counsel.
B) Choose Experienced Arbitrators
The parties should choose their arbitrators with the same care they draft their arbitration agreement and choose their counsel. It should be clear by now that realizing arbitration's potential benefits requires the process to be different from litigation. As with counsel, the parties should choose arbitrators who are experienced and comfortable with those differences. There is no shortage of retired judges and senior litigators practicing as arbitrators. Unless the parties do want private litigation, before appointing one of them the parties should ensure that the proposed appointee is cognizant of the differences between arbitration and litigation, and prepared to run the arbitration in a manner to realize its potential benefits.
Beyond that, the parties should consider what kind of person they need to resolve the dispute at hand. There is a very human dimension to that consideration. What is the dynamic between the parties? Do they need someone who will bend over backwards to be fair or a firm hand on the tiller? What is the nature of the dispute? Do they want a "black letter" lawyer or a more flexible decision maker?
Practical considerations like availability and location also factor into this analysis.
The take away is that, having decided on arbitration, with the potential benefit of input into the choice of decision maker, the parties should consider carefully what qualities they really need in an arbitrator, and select someone who has them.
C) Make a Schedule Early and Try to Stick to It
The greater the number of participants (parties, counsel and arbitrators), the harder it is to find deadlines and hearing dates that work for everyone. A simple tip is to ask the tribunal to hold a conference call early on to consider a prehearing schedule and make a procedural order incorporating the necessary steps and deadlines. Some arbitral rules provide for mandatory case conferences early in the process.
Given how difficult it can be to schedule hearing dates, parties should make their best efforts to meet the deadlines. That said, problems and delays do arise. For example, document review may consume more time than expected or someone key may fall ill. To avoid the difficulties caused by a compressed timeline, consider building into the schedule a bit of flexibility, for example leaving time between the last required step and the hearing, to allow deadlines to be pushed back while maintaining the hearing dates.
D) The Less Involved the Tribunal, the Better
Tribunals appreciate reasonable counsel. To the extent counsel can agree on matters, the parties save the cost, and time, of having them resolved by the tribunal. The tribunal will appreciate that (and so will the parties' financial officers).
E) Focus Document Requests on Material Items
In the email age, litigation document discovery ("all relevant documents") can be a nightmare. Avoiding that is one of the important potential advantages of arbitration. The scope of document disclosure in an arbitration depends on the procedural rules chosen by the parties, and it is an important consideration in that choice.
Under most rules, the document disclosure required is narrow. However, there remain some rules, which permit broad disclosure – almost litigation-like. But even if you are operating under those rules, one cost saving tool is to focus requests for disclosure on material documents, assuming the situation permits. Consider also restrictions on date ranges. Keep requests narrow. This approach may avoid the cost of counsel needing to wade through thousands of possibly relevant, but not material, documents. The IBA Rules on the Taking of Evidence in International Arbitration provide excellent guidelines on document production, and there is no reason the IBA Rules, or similar international rules, cannot be adopted as guidelines in a domestic arbitration.
Where document disclosure is limited to material documents, or even reliance documents, by rule or by party-conduct, cost savings will be automatic.
The ability to work with less than all potentially relevant documents is a key qualification of effective arbitration counsel.
F) Keep Experts to a Minimum
Does this dispute really need an expert? If it does, how many? Efficient and cost effective arbitrations use a minimum of experts. Of course, if the arbitration does have several issues that require expert evidence, counsel should be careful in choosing a "jack-of-all-trades" expert, lest their qualifications be seen as less impressive than specialized experts and harm their credibility.
G) Avoid a Run-Away Tribunal
In the end, the arbitration experience should be party-driven. That is one of arbitration's basic concepts. It is important to avoid having a tribunal that takes on too much (and then costs too much). Part of achieving that comes from the initial selection of the arbitrator(s). Another tip to keep the tribunal on track is to base all activity on its procedural orders. Another is for counsel to approach the tribunal jointly with any concerns about the process, if such an approach is absolutely necessary. Ideally, counsel will not have to, and rarely do they have to, resort to this extreme, but must be prepared to do so in the interest of an efficient arbitration.
The prevailing view in the ever-globalized commercial world is that arbitration is the most effective dispute resolution mechanism. This view is increasingly shared in domestic circles because arbitration has many potential advantages over litigation. If the parties take proper care to design, and implement, a process which actually realizes those potential benefits, arbitration can be much, much more than private litigation.
Originally published in Le Journal canadien d'arbitrage et de mediation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.