The world of arbitration is responding to its detractors with initiatives that address recent criticism over areas such as a lack of transparency and diversity. These reforms could ensure arbitration remains a viable option for disputes in uncertain times.
Investor-state dispute settlement (ISDS) is a system through which companies can sue countries for alleged discriminatory practices. In this area of arbitration, transparency has become key.
‘There is a concern the process is skewed in favour of corporate interests,’ says Philippa Charles, Head of International Arbitration at Stewarts Law. ‘Many high-profile arbitrators are also partners in multinational law firms, which may have client relationships with those corporate interests. This has led to a rash of challenges to arbitrators in ISDS cases, but also to a pervasive concern that the process by which decisions are made is too opaque.’ This is particularly a concern ‘in cases where a state’s … legislative business may be deemed to result in liability to a foreign corporate interest,’ she says.
In fact, investor success is limited in these disputes, according to statistics available from the International Centre for Settlement of Investment Disputes (ICSID) and other bodies conducting ISDS cases. Many cases fail to pass a jurisdiction hurdle, and of those that succeed on the merits, the level of damages awarded is, on average, a fraction of the amounts claimed.
Despite this, the European Union has abandoned ISDS in favour of a new Investment Court process to be adopted for all future trade agreements with non-EU states. Yet, it does not seem to have completely abandoned arbitration, having agreed to continue funding the United Nations Commission on International Trade Law’s (UNCITRAL) Transparency Registry. The Registry was established in accordance with the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration to make information on investor-state arbitrations available to the public. More transparency would lead to more confidence in the system, says Eduardo Silva Romero, Co-Chair of Dechert’s International Arbitration global practice and Co-Chair of the IBA Arbitration Committee.
The UNCITRAL Transparency Registry will ‘help achieve [transparency] by making information on investor-state arbitration available to the public through a case record database,’ he says. ‘Opening hearings to the public and publishing documents related to the proceedings are other ways transparency in investment arbitration could be increased.’
Additional efforts include the International Chamber of Commerce (ICC) publishing the identity of appointed arbitrators, and projects designed to give those proposing arbitrators a better sense of their options when nominating, allowing them to make an informed decision. These include Professor Catherine Rogers’ Arbitrator Intelligence project and Global Arbitration Review’s Arbitrator Research Tool. Publication of arbitration awards, with the parties’ permission, is also being discussed.
Transparency initiatives should enable participants in arbitration to point to the data obtained about the case, to reassure those who have concerns about the security and legitimacy of the process. However, many in the arbitrator community are concerned that such initiatives could become a form of ‘Tripadvisor for Arbitrators’, with the attendant risks that disgruntled users may provide disobliging commentary on their performance. ‘However, it can only be in the interests of arbitration as a process for more information to be made available,’ says Charles, ‘particularly to those [who are] not part of one of the sophisticated large arbitration practices that have in-house knowledge of arbitrator candidates.’
Further change is likely to be brought about at the initiative of individual arbitral institutions, which can amend the rules applicable to the transparency and confidentiality obligations of the parties, including publishing statistics, awards or arbitral documents. ‘One suggested approach is a default opt-in provision in arbitral rules, allowing the publication of awards unless a party makes a specific objection,’ says Philip Chong, DLA Piper’s Head of International Arbitration, Europe. ‘Such an opt-in provision could also be incorporated into the English Arbitration Act 1996 (AA 1996), which is under review by the Law Commission of England and Wales.’
“ It can only be in the interests of arbitration as a process for more information to be made available"
Head of International Arbitration, Stewarts Law
One concern for those practising in international commercial arbitration, says Charles, is that the issues raised about the transparency of the ISDS mechanism will begin to affect the perceived legitimacy of commercial arbitration, too.
Pascal Hollander, a partner at Hanotiau & van den Berg in Brussels and Vice-Chair of the IBA’s Arbitration Committee, agrees. ‘The need for increased transparency is certainly justified in investment arbitration because of the public interest dimension, but is completely misplaced in commercial arbitration, where one of the widely-admitted advantages of arbitration versus litigation is precisely the possibility to preserve confidentiality over the dispute.
‘I fear commercial arbitration, which still accounts for the overwhelming part of all disputes submitted to arbitration, is under threat of being contaminated by the bad publicity that, rightly or wrongly, investment arbitration receives.’
What are the main pros and cons of arbitration?
Philip Chong, DLA Piper’s Head of International Arbitration, Europe, outlines the main advantages and disadvantages of international arbitration.
Enforceability: Arbitral awards are automatically enforceable in the 157 countries that are parties to the New York Convention 1958.
Finality: Arbitration awards are usually final, and can only be challenged in very narrow circumstances (eg, arbitrator bias). There is normally no right of appeal.
Flexibility/party autonomy: Parties to an arbitration normally have the right to select (a) the institutional rules governing the arbitration and/or the forum (seat) of the arbitration; (b) one or more of the arbitrators; (c) the language of the arbitration; and (d) the venue of the arbitration.
Confidentiality: Subject to a narrow set of exceptions, arbitrations are confidential. Court proceedings generally are not.
Neutrality: Where proceedings are brought against a state, or where an unbiased trial may not be available in local courts, arbitration can provide a neutral forum in which disputes can be fairly resolved.
Evidential rules: Disclosure obligations are generally narrower in arbitration proceedings than in, for example, English litigation proceedings (although the gap is narrowing). This can save significant time and costs.
Finality: The inability for parties to appeal in arbitration can be a double-edged sword, particularly where the issues are finely-balanced or the points of law contentious. In addition, the quality of the arbitral award is only as good as the tribunal deciding it.
Unavailability of summary relief: Summary relief, such as strike-out or summary judgment, which in court proceedings are available to resolve one-sided disputes quickly, are not usually available in arbitrations. Therefore, it is often more difficult to dispose of such issues at an early stage in arbitration proceedings.
Difficulties with interim relief: Similarly, although tribunals may have the power to grant interim relief (such as injunctions), such relief may be difficult to enforce in other jurisdictions unless supported by a local court order. Moreover, particular relief available to the court – for example, worldwide freezing injunctions – are generally not available to arbitral tribunals.
Multi-party disputes: In many cases, it will not be possible to join a party to existing arbitration proceedings, or to consolidate two separate arbitrations, unless the arbitration agreement has been carefully drafted and the choice of institutional rules properly considered. By contrast, joining parties to extant litigation proceedings is easier.
Lack of decisiveness: Tribunals can suffer from a lack of decisiveness when it comes to enforcing their own procedural orders or institutional rules (for fear of having their final awards challenged).
In 2015, women represented just ten per cent of all appointments and confirmations on arbitral tribunals, and were more often appointed as co-arbitrators (43 per cent) than sole arbitrators (32 per cent) or tribunal presidents (25 per cent) according to ICC statistics. Overall ICC data shows that, to November 2016, only 20 per cent of arbitrators appointed were women.
Berwin Leighton Paisner’s (BLP) recent international arbitration survey ‘Diversity on Arbitral Tribunals, Are We Getting There?’ confirmed that practitioners and users of international arbitration across the world are alive to issues of diversity. Eighty per cent of respondents thought tribunals contained too many white arbitrators; 84 per cent thought there were too many men, and 64 per cent felt there were too many arbitrators from Western Europe or North America.
‘While it is true that the arbitration community has taken some steps to address diversity issues, many feel that there is still some way to go,’ says Carol Mulcahy, a partner in the International Arbitration group at BLP.
The Equal Representation in Arbitration Pledge, launched in May 2016, has had a positive impact. Signatories commit to consider whether, in forming tribunals, selecting counsel/experts and making appointments, there is an appropriately-qualified woman who should be put forward.
‘Over the last ten to 15 years, we have seen the choice of arbitrators narrow to a handful of mainly male, middle-class barristers,’ says Holman Fenwick Willan partner Andrew Williams. ‘However, with the advent of the Pledge, we are starting to see a greater number of female candidates being proposed as arbitrators, across different age groups, nationalities and socio-economic backgrounds, and with varying levels of experience.’
‘However,’ says Charles, ‘as most tribunal appointments are in the hands of party counsel, the efforts made by institutions to grow the pool of arbitrators are reaching their limits: further progress will require more from law firms and clients.’
Cost and delay
The fees payable to arbitrators and the arbitral institution may render an arbitration as expensive, or even more so, than court proceedings. This is particularly the case where, as in arbitration proceedings conducted under ICC Rules, the amounts payable to the tribunal are linked to the value of the dispute.
The recent decision of the English Commercial Court in Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd (Essar) could shake up the litigation funding market as it applies to arbitration.
Litigation funding involves a third-party funder agreeing to pay some or all of the costs of pursuing legal proceedings in exchange for a share of the proceeds, if they are successful or there is a favourable settlement.
“ We are starting to see a greater number of female candidates being proposed as arbitrators, across different age groups, nationalities and socio-economic backgrounds"
Partner, Holman Fenwick Willan
The court in Essar held that the ability for an arbitral tribunal to award costs under the AA 1996 includes the costs associated with the litigation funding – that is, the tribunal was able to grant to the successful party not only the costs of pursuing the arbitration, but also the share of the proceeds awarded to the litigation funder as a result of the successful arbitration award.
‘Unless it is overturned on appeal, this is likely to increase the attractiveness of arbitration as a dispute resolution mechanism, as it should encourage claimants to bring more claims by arbitration in the knowledge that the costs they may have to pay to the litigation funder may be refunded if the claim is successful,’ adds Chong.
New ICC rules, adopted in March, are also likely to impact arbitration. ‘Pursuant to these new rules, arbitrators receive reduced fees in cases of undue delays, where the amount in dispute is less than US$2m,’ says Silva Romero. ‘The aim is to reduce the length of arbitration proceedings and to enhance efficiency. These reforms should encourage more arbitration in relation to smaller disputes.’
Signature Litigation partner, Ioannis Alexopoulos, would like to see a greater willingness by tribunals to help maintain procedural timetables, and to use sanctions for non-compliance with deadlines, as well as greater willingness to deal with weak claims or defences summarily.
Chong agrees. ‘Reluctant parties that fail to meet deadlines or flaunt procedural orders are sometimes let off the hook by tribunals, who fear their awards being challenged and prefer to deal with the problem (if at all) by a costs adjustment. While nobody would wish to see the user-friendliness of the arbitration process diminished, granting tribunals the power to curb such behaviour without fear of undue redress would be welcomed.’
The Arbitration Club Financial Sector Branch has developed a Financial Services Expedited Arbitration Procedure (EAP) to address concerns over the lack of summary judgment or strike out powers for unmeritorious claims or defences or, where they do exist, a failure to use them.
‘The EAP ensures arbitrations are conducted more quickly and cheaply by imposing measures designed to make the process more efficient,’ says Simmons & Simmons managing associate, Basil Woodd-Walker. ‘These include imposing strict timeframes on parties and arbitrators, limiting the length of pleadings, limiting disclosure and allowing for any dispute to be determined on the papers. The procedure is ideal for straightforward debt claims. The EAP gives parties limited opportunity to drag out proceedings or make unmeritorious and unsubstantiated assertions. If the EAP is adopted and followed, there should also be limited opportunity for a losing party to complain about the procedure adopted, since they agreed to that procedure being adopted at the outset in their arbitration agreement.’
Geneva, Hong Kong, London, Paris and Singapore all ‘have a favourable legal environment for arbitrating disputes,’ says Silva Romero. ‘The legal system is neutral and impartial, agreements to arbitrate and arbitral awards are readily enforced, the national arbitration law is favourable to arbitrators and there is little judicial interference in the arbitral process. In France, for instance, domestic courts automatically decline jurisdiction as long as there is a prima facie valid arbitration agreement and the possible grounds for annulment of an award are also limited.’
“ Uncertainty persists as to whether... English court judgments will be enforceable in the EU after Brexit... No such uncertainty applies to arbitration awards, which will remain automatically enforceable"
Head of International Arbitration, Europe, DLA Piper
Singapore is the ‘new Mecca’ for arbitration in Asia, says Hollander. ‘In Singapore, the Civil Law (Amendment) Act 2017 entered into force in March, permitting third-party funding of international arbitration,’ says Chong. ‘Improvements to the availability of arbitral facilities and institutions in Singapore have also been announced. The Permanent Court of Arbitration is to set up an office this year to manage hearings held in Singapore and Asia, and the ICC Court has announced it will set up a case management office in Singapore in 2018.’
Third-party funding has also become available in Hong Kong following the passing of the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2017. The Paris Bar Council has also indicated its support for third-party funding. ‘The recent proposal by the French government concerning the establishment of an English language court handling English law disputes shows an increased appetite in Paris for competition with London for a position as the preferred seat of international dispute resolution,’ says Chong.
Russia has also introduced reforms to its arbitration law to bring it more in line with UNCITRAL. ‘The new rules introduce significant regulation of arbitration institutions, both domestic and international/foreign,’ says Alexopoulos. ‘Some of these changes have been designed to develop and increase the use of arbitration in domestic disputes, and to regulate an ever-increasing number of local institutions. The new rules, however, also remove certain types of disputes from arbitration, especially disputes involving a public element. The new Russian legislation also requires arbitration institutions to register locally. It remains to be seen whether this will increase or decrease the use of arbitration in Russia.’
The recent launch of the British Virgin Islands International Arbitration Centre is an interesting development, says Hollander. ‘Their state-of-the-art hearing facilities are impressive, and so is the modernisation of arbitration law in the British Virgin Islands.’
Brussels could become a seat of choice in the future too, as the public image of European institutions has recently improved. Belgian arbitration law was reformed in 2013, and an online platform, brusselsarbitrationhub.eu, has been launched. This one-stop website centralises all the information required for conducting hearings in Brussels.
London, Hollander says, is still very present, but the uncertainty surrounding Brexit might make it a less attractive seat. This echoes a widely-held view that Brexit may have an adverse effect on London’s dominance in international arbitration.
However, in a recent speech to the National Judges College, Beijing, the Lord Chief Justice of England and Wales, Lord Thomas, declared: ‘Far from having any adverse effect on arbitration, there is a strong case that [Brexit] will have a beneficial effect.’ Lord Thomas’s reasoning is rooted in the clarity of English law and its consequent appeal to parties to international disputes, the strong support for arbitration under the law of England and Wales, and the enforcement characteristics of arbitration awards.
‘Despite government assurances, uncertainty persists as to whether and, if so, how English court judgments will be enforceable in the EU after Brexit (and its attendant mutual recognition and enforcement treaties for court judgments) in March 2019,’ says Chong. ‘No such uncertainty applies to arbitration awards, which will remain automatically enforceable in EU member states pursuant to the New York Convention of 1958.
‘Parties can therefore continue to have the best of both worlds, post-Brexit: they can select English law to govern their disputes, choose arbitration as the dispute resolution mechanism, and choose an English seat for the arbitration, safe in the knowledge that any award will continue to be enforceable in the EU. At present, they do not have that assurance in respect of judgments of the English court. This may lead to more parties choosing arbitration following the UK’s departure from the EU.’
Williams envisages arbitration increasing its share of the international disputes market in the run up to and after Brexit. ‘We have already seen a number of clients amend their dispute resolution/jurisdiction clauses to provide for London arbitration rather than the jurisdiction of the English courts.’
As London currently has a developed arbitration community, and is a relatively favourable seat to arbitrate in, Brexit may have little impact for the near future, says Silva Romero. ‘However, it seems reasonable to have concerns that, in the longer term, the cultural mood in Britain could become more hostile to arbitration, eventually affecting its suitability as a seat. Brexit does not seem to have been borne of a mood favourable to international cooperation and institutions, and Lord Thomas’s Bailii speech suggests some elements of the judiciary who would not be averse to such a mood limiting the role of arbitration in Britain.’
Lucy Trevelyan is a freelance journalist and can be contacted on firstname.lastname@example.org