Part II Understanding the Users of International Arbitration, 4 Putting the Client First
Peter J Rees
From: Defining Issues in International Arbitration: Celebrating 100 Years of the Chartered Institute of Arbitrators
Edited By: Julio César Betancourt
- Arbitral agreements — Arbitral tribunals — Arbitrators — Claims — International courts and tribunals, procedure
4.01 I was, understandably, excited when I made my first visit to the US Supreme Court. I would have been even more excited if the case hadn’t been of such crucial importance to my company and to multinational corporations everywhere. I had read the briefs, including the legion of amicus briefs that had been filed in support of the respective parties and ISNP—‘In Support of Neither Party’—an interesting concept in itself, and was looking forward to hearing the argument.
4.02 My counsel had told me not to bring any electronic devices as they were forbidden, and so I had the liberating, but not entirely comfortable, feeling of being physically separated from my Blackberry for what turned out to be nearly six hours (we had a good lunch afterwards). I lost count of the number of times I instinctively reached into the inside pocket of my jacket only to find it was empty. My counsel had also told me that I wasn’t allowed to bring any written material with me, no copies of the briefs, no folders, nothing. All I was allowed was a pad and a pencil.
4.03 Finally, my counsel had also told me that on arrival (which she suggested should be about 9 am, an hour before the hearing was due to commence) I should report to the Marshal’s office and from there I would be shown to my seat. While I was queuing to get to the Marshal’s office, I was handed a small leaflet. It was entitled ‘Supreme Court of the United States—Visitor’s Guide to Oral Argument’. Inside, the opening words were: ‘Welcome to the Supreme Court of the United States. This is your Supreme Court …’
4.04 However, as I read further, and as I waited in the queue, and as, finally, I was shown to my seat, I began to wonder whose Supreme Court they meant it was. After the section explaining how the oral argument would run, there was another section entitled ‘Participants in the Courtroom’, which set out who does what and where they sit.
who sit on the bench in order of seniority, with the Chief Justice in the middle;
who sits to the left of the bench;
who sits to the right of the bench;
who are seated behind the Justices; and
those scheduled to argue the case are seated at tables facing the bench.
(p. 46) 4.06 But it then went on to provide that attorneys who are admitted as members of the Supreme Court Bar may be seated in the chairs just beyond the bronze railing and that members of the Supreme Court bar may attend any argument, space permitting. Nowhere in the section headed ‘Participants in the Courtroom’ did I see where I, the client, should sit.
4.07 And then I noticed another section in the leaflet headed ‘Others’ and I thought—fair enough, I suppose I may be viewed as not being an actual participant (although I struggled to see how curious members of the Supreme Court Bar could be viewed as such) and so I looked at that section in anticipation of guidance as to where I should go.
4.08 First in the ‘Others’ section were ‘Law Clerks’. Each Justice has the option of employing up to four law clerks, I read. They are seated in the chairs flanking the courtroom on the right. Next came ‘Special Guests’. Aha, I thought, at last! But I was disappointed. It read: ‘Guests of Justices are seated in the benches to the right of the Bench and are seated in order of the seniority of the Justice who invited them. The row of black chairs in front of the guest section is reserved for retired Justices and officers of the Court, such as the Reporter of Decisions or the Librarian.’
4.09 Finally in the ‘Others’ section came ‘News Media’, which read: ‘Members of the Supreme Court press corps sit to the left of the Bench in the benches and chairs facing the guest section.’ By this time it was 9.30 am and I had reached the front of the queue at the Marshal’s office and I was shown to my seat—five rows back in the public seating area on the opposite side of the courtroom to my counsel.
4.11 My US Supreme Court example is just one of a number of instances where, when you look at the processes that are adopted for resolving disputes between clients (and without clients there would be no disputes, no courts, and no arbitral tribunals), the interests of the client do not always seem to be at the forefront of the thinking of those responsible for formulating the way in which disputes are resolved.
4.12 Arbitration was created, and has evolved, as an alternative to the rigid formality of court proceedings. It is supposed to be a flexible, client-focused process, and in many respects it is. The client is usually involved in the selection process of the tribunal, the proceedings are often confidential to help protect client privacy, and the client has an expectation of a speedier, more cost-effective dispute resolution process.
4.13 However, as arbitration has continued to evolve in the modern era, it is valid to ask: has it retained that vital client focus? Perhaps the same question should be posed about arbitration as posed about the US Supreme Court. Whose arbitration is it anyway?
4.14 In pursuit of this question I intend to look at just two aspects of modern arbitration practice which may not be as client focused as they could, and should, be. Before doing so, however, I want to start with what sounds like a very basic and very obvious proposition, but which often gets forgotten when designing dispute resolution processes, namely that clients’ interests are most likely to be aligned before there is a dispute. Once a dispute has arisen, even (p. 47) the most reasonable of clients can become unreasonable—at least unreasonable in the eyes of the client on the other side—which, of course, thinks it is being perfectly reasonable.
4.15 So, if anything is going to be done to address the expensive and time-consuming aspects of the dispute resolution process, it needs to be done before the dispute starts. It needs to be in the rules which will apply to the arbitration.
4.16 Much of what I am about to say is not new. But I get the impression that, in the past, at least, although clients have said one thing, what has been heard by the rule-makers and those who apply the rules, namely arbitral institutions and arbitral tribunals, has been another thing.
4.17 It rather reminds me of those apocryphal examples of ‘squawks’ from the US Air Force. Squawks are problems which are noted by US Air Force pilots and left for maintenance crews to fix before the next flight. The pilots leave a note with the problem described and the maintenance crews leave a note for the pilots with the solution. But what is reported as a problem, and what is done to address the problem, is not always what was expected. For example:
4.19 Much is said in arbitration circles about the need to reduce the time and cost of arbitration, and that need is certainly there, but at the moment this is based on the flawed assumption that this is the only issue clients have with arbitration, and also the belief that with a little guidance and prodding, arbitral tribunals will magically become more proactive, more willing to take risks, more willing to impose efficient processes on parties even if it is against both parties’ wishes, and, generally, will act a bit more like judges in the English court system.
4.20 There is, sadly, no evidence that any of this is really happening. There is evidence that attempts are being made to address some of these issues, but the attempts are, to my mind, falling well short of what is needed. This is amply demonstrated by some of the latest rule changes that have been made in the cause of speed and efficiency.
4.21 With much fanfare, the ICC included in its new 2012 Rules a provision that the arbitral tribunal must convene a case management conference. However, this is not a case management conference where the tribunal tells the parties what they should be doing, or restricts the parties’ ability to play games with procedural issues. The lack of robustness in the approach is given away by the wording of Article 24(1), which says: ‘the arbitral tribunal shall convene a case management conference to consult the parties on procedural measures that may be adopted’.1
(p. 48) 4.22 I am afraid that I cannot see that provision giving an arbitral tribunal more teeth than it already has—and that is very few. Arbitral tribunals need to have their powers spelled out clearly and unambiguously and arbitral institutions need to be willing to give more power to arbitral tribunals, power that can be used even if the parties want to do something different.
4.24 When I first started in the law in the late 1970s, I had drummed into me the six advantages of arbitration over litigation—speed, cost, flexibility, ability to choose your tribunal, confidentiality, and enforceability.
4.25 Speed and cost of arbitration have long since ceased to be advantages as litigation has got quicker and cheaper—at least as far as the vast majority of English Commercial and Technology and Construction Court cases are concerned. Confidentiality of arbitration in many jurisdictions is rapidly being eroded and, with the advent of the Brussels Regulation, arbitration only has the upper hand when it comes to enforcing outside Europe.
4.26 The ability to choose your tribunal remains, although increasingly that seems, to me, to be an illusory advantage and, as for flexibility, having been involved in arbitrations both as counsel and arbitrator for the last 30 years, I have concluded it was always a myth. I have seen very, very few flexible processes adopted by tribunals over the years and almost none when it was clear that the parties were not keen on departing from the well-trodden track.
4.27 But, wait a minute, why would a client argue for his wishes to be overridden by an overly assertive tribunal? Well, just as the most reasonable and sensible people can turn into aggressive maniacs once they get behind the wheel of a car, so can clients when they get into a dispute. All sense of reason, and reasonableness, goes, and the only imperative is to win, and to do whatever that takes, even when it is against your cultural and legal background.
4.28 By way of example, I chaired an arbitral tribunal a few years ago in a dispute between an Italian company and an English company. The arbitration clause in the contract provided for ICC arbitration with the seat to be in London. It said nothing about disclosure of documents.
4.29 If the parties had been asked at the time the contract was entered into how they wished disclosure to be dealt with, you might have expected them to respond in line with their legal and cultural backgrounds: the English party might have been in favour of fairly comprehensive disclosure and the Italian party may not have wanted any—or at least not much. Whether an agreement could have been reached at that stage as to how disclosure would be dealt with, who knows, but I wager it would have been easier than once the dispute started.
4.30 And what happened once the dispute started? At the procedural hearing, the Italian party pressed for full-blown English-court-style disclosure and the English party objected to (p. 49) such wide-ranging disclosure and looked to limit it as much as possible. My tribunal did what most arbitral tribunals usually do—and that was not to depart from the well-trodden track. We ordered disclosure in accordance with the IBA Rules on the Taking of Evidence. We felt, as I know many tribunals feel, that we didn’t have the power at our disposal to be more flexible or radical.
4.31 Arbitral tribunals need to be invested with the power to be flexible; they need to be able to say to the parties: ‘I am going to order this and you, as the parties, agreed that I have the power to do this because you gave it to me in your arbitration clause or in the institutional rules you agreed.’ At present, however, arbitral tribunals cannot take that robust approach.
Arbitral tribunals usually prefer to avoid making rulings on disputed procedural matters in the early stages of an arbitration. Where there is a disagreement between the parties, arbitrators often suggest compromise solutions. This appears to derive from the complexities of tribunal psychology, as a result of which individual members of arbitral tribunals (and particularly the presiding arbitrator) are reluctant to make rulings at the start of the arbitration that one of the parties may regard (however unjustifiably) as amounting to unfair treatment.2
4.33 This means that, absent party consent at the time of the dispute, arbitration is lacking certain procedural tools that are available to judges. Tools that can save a lot of time and cost. The two that I have particularly in mind are strike-outs and preliminary issues. Certainly, from the client’s perspective, a tribunal which is not willing, or empowered, to strike out a clearly unmeritorious claim, or is not willing or empowered to order a preliminary issue to be dealt with, is one which is inevitably going to preside over proceedings which will take too long, cost too much, and not get the issue resolved as quickly as it should.
4.34 However, unless arbitral tribunals are specifically empowered to strike out cases which are without merit, they are not going to do so of their own accord, and, at the moment, the wording of many of the rules of the arbitration institutions make it clear that they cannot do so. The LCIA Rules (Article 14.4(i)) require the tribunal to ‘act fairly and impartially as between all parties, giving each a reasonable opportunity of putting its case’. The ICC Arbitration Rules (Article 22(4)) require the arbitral tribunal to ‘act fairly and impartially and ensure that each party has a reasonable opportunity to present its case’. The UNCITRAL Rules (Article 17.1) also require that ‘at an appropriate stage of the proceedings each party is given a reasonable opportunity of presenting its case’. The UNCITRAL Rules (Article 17.3) go even further by providing that: ‘If … any party so requests the arbitral tribunal shall hold hearings for the presentation of evidence by witnesses, including expert witnesses, or for oral argument.’
4.35 Although it is perfectly possible to argue that, if a party makes a strike-out application, the tribunal can say that this is the time for the other party to present its case as to why it shouldn’t be struck out, it does not work like that. The vast majority of arbitrators take the view that, no matter how unmeritorious the case appears to be, it has to go through to the bitter end, including document disclosure, oral testimony, and legal submissions.
(p. 50) 4.36 As far as I can establish, there are only two published ICC cases3 where summary motions were brought by respondents to the claim against them and, although the tribunals in question seemed to accept that they had power to consider the motions, both were dismissed on the basis that it wasn’t crystal clear that the claims had no legal basis. It appears that a much higher threshold was adopted than the ‘no reasonable grounds’ we use in English court proceedings.
4.37 Interestingly, there is only one set of arbitration rules that provides for some form of summary judgment procedure and that is the ICSID Rules, Article 41(5) of which permits a strike-out application. It says: ‘a party may … file an objection that a claim is manifestly without legal merit. The party shall specify as precisely as possible the basis for the objection. The Tribunal, after giving the parties the opportunity to present their observations on the objection, shall, at its first session or promptly thereafter, notify the parties of its decision on the objection.’
4.38 The ICSID Rules also allow for other objections, including jurisdiction, to be raised and dealt with as preliminary issues. In 2009/2010, ICSID dismissed two cases following a preliminary hearing—Global Trading Resource Corp and Global International, Inc v Ukraine4 and RSM Production Co v Grenada.5 Neither was dismissed on the ‘manifestly without legal merit’ ground—one was on jurisdiction and the other on the basis that a previous case based on largely the same facts had decided the question brought—but, at least, they were got rid of at an early stage.
4.40 Of course, the big fear that arbitral tribunals have, both generally and in the context of striking out applications, is that their awards will be open to challenge if they do not have clear powers or if they depart from the well-trodden track; and so, if we are to encourage the dismissal of unmeritorious cases at an early stage, arbitral tribunals need to be supported in every way possible.
4.41 This means both changing the rules of arbitration institutions to permit strike-outs and providing the necessary judicial support to uphold them. That support should be forthcoming in England and Wales given that summary judgment and strike-outs are part of our civil procedure, and, in the United States where the Revised Uniform Arbitration Act gives (in section 15(b)) specific power to arbitrators to deal with summary disposition of a claim. Even if other jurisdictions are less willing or able to give such support, a rule change implemented by the major institutions permitting strike-outs, and supported by English and US judiciary, would be a start.
(p. 51) 4.42 The other area of focus for expediting arbitration proceedings should be preliminary issues. Arbitral tribunals need to be much more proactive in identifying preliminary issues at an early stage in the proceedings and then dealing with them. Even if the issue will not be dispositive of the case, much can be achieved by the parties knowing the answer to at least one, if not more, of the major issues between them, and this can often drive settlement.
4.43 Further, if a preliminary issue is identified early, and dealt with, the parties will not only have that part of their dispute resolved, but they will each have an insight into the approach the tribunal has taken to that issue, and that may, in turn, inform their thinking about how other issues in dispute may be handled.
4.44 Yes, on occasions, it may lead to a higher overall cost if the dispute is not settled and does proceed to a full-blown hearing, but the opportunity to try and cut things short should not be spurned too lightly, as it often is at present. It seems that, in this area, the innate conservatism of rule-makers and arbitrators has overridden what the clients would see as a straightforward risk issue.
4.45 Businesses work on risks. The risks involved in entering into a transaction, pursuing an exploration opportunity, working with a particular partner in a joint venture, or investing in the territory of a potentially unstable government are examined, calculated, and used by businesses in the decision-making process. Transactions are concluded and projects undertaken when the probability of success is well below 100 per cent (which it always is) and often when it is below 50 per cent.
4.46 So, when clients look at the risks involved in court and arbitration proceedings, they do so through an entirely different lens from their legal advisors. There can be certain upsides to having a particular issue dealt with early that may make the risk of increased costs worthwhile. The risk involved in having a tribunal or a court take a preliminary issue which may not be dispositive of the dispute, or make a significant overall saving in cost, is one which clients may, more often than not, be prepared to take.
4.47 The 2012 QMUL Survey included an examination of methods of expediting arbitral proceedings.6 Practitioners were asked about the effectiveness of early identification by the tribunal of issues to be decided, and having those issues dealt with as soon as possible after constitution of the tribunal. Of those surveyed, 64 per cent said this was either most, or quite, effective at expediting arbitral proceedings. When you add to that figure the 13 per cent who said they had never seen it happen, then you arrive at the sorts of odds on which most commercial clients would happily take a risk.
4.48 The English courts already permit the hearing of preliminary issues, so can arbitrators—if armed with the ability in arbitration rules to use such tools—take lessons from the courts? The answer, to my mind, is a definite no. While it is clear that the courts have the ability to take preliminary issues, they seem to lack the necessary conviction. It is no good giving arbitral tribunals the tools if, like the courts, they are not prepared to use them, and use them imaginatively.
(p. 52) 4.49 The test adopted in the English court system for whether there should be a trial of preliminary issues falls way short, in my submission, of the flexibility that the arbitration system could apply if it only had the tools to do so, and it would be a serious mistake to seek to apply the English court test in an arbitration context. Nothing would be gained.
4.50 My view, as a former in-house counsel, and, I would hazard a guess, that of many other general counsel of large corporations, is that the test that should be adopted in deciding whether to have a trial of preliminary issues in arbitration proceedings is whether resolving the issue in question will help the parties involved to better understand their overall position or be better able to reach a settlement.
4.51 The approach used in the English courts is set out in the relevant Practice Direction,7 which states that the test is whether ‘it will be just and will save costs to order a split trial or the trial of one or more preliminary issues’.
4.53 In SCA Packaging Ltd v Boyle (Northern Ireland),8 the House of Lords gave its guidance on the limited circumstances in which it would be appropriate to order the trial of preliminary issues. Lord Hope of Craighead observed that:
The essential criterion for deciding whether or not to hold a pre-hearing is whether, as it was put by Lindsay J in CJ O’Shea Construction Ltd v Bassi,9 there is a succinct, knockout point which is capable of being decided after only a relatively short hearing. This is unlikely to be the case where a preliminary issue cannot be entirely divorced from the merits of the case, or the issue will require a substantial body of evidence. In such a case it is preferable that there should be only one hearing to determine all the matters in dispute.
4.54 In addition, Lord Brown stated that unless there was a ‘probability’ that a preliminary issue would be ‘determinative one way or another of the entire dispute’, it was highly unlikely to be justifiable to set down the issue to be determined on a preliminary basis. What is clear from all this is that there is a fixation in the court system on there being a single hearing and that if a preliminary issue is to be tried it has to be a ‘knockout point’.
4.55 Looked at from the perspective of ease of administration of the court system, I can see there are benefits to there being only a single, all-in hearing. However, looked at from the perspective of the parties, commercial parties at least, that is not necessarily what they want. It bears repeating that the determination of preliminary issues can be incredibly useful to clients even if the effect is not a knockout of the whole case. Decisions on certain issues can drive overall settlement and, even if it does not work out on every occasion and overall costs end up being more than they would if there had been a single hearing, commercial clients will often be prepared to take that risk.
4.56 Now, don’t get me wrong, I am not advocating this adventurous approach only where both clients are in agreement. That would be too easy and would forget what I said earlier about (p. 53) the change in mindset of otherwise reasonable commercial organizations once a dispute has arisen. No, this is something an arbitral tribunal should be willing to do if there is a sound enough argument put forward by one of the parties because, inevitably, the other party, with an interest in prolonging proceedings, or waiting to see if something turns up, will almost certainly oppose it.
4.57 Let me use two examples of where a preliminary issue would, almost certainly, not be viewed in the courts as a knockout blow to the case, but which it would be nice to think an arbitral tribunal, armed with appropriate powers, would grasp with both (or all six) hands.
4.58 Suppose you have a dispute between a manufacturer and a customer. As is often the case in contracts for the manufacture of large engineering products (say air compressors) for inclusion in industrial projects, there is a limitation of liability provision limiting the manufacturer’s liability for breach of contract to the contract price or a percentage of the contract price. Let’s assume that limitation, in monetary terms, is £10 million. The customer is alleging breach of contract (the product failed), is claiming damages of £100 million, and is arguing that it is not bound by the limitation of liability. This can be for any number of reasons—battle of the forms, subsequent contractual variation, waiver, misrepresentation, and umpteen other possibilities. The manufacturer says it is not in breach of contract, but even if it is, its maximum liability is £10 million.
4.59 What is imperative for both clients to know is whether this is a £10 million case or potentially a £100 million case. The customer may not admit to that imperative because it thinks it may have a better chance of influencing the court its way if the court can see how egregious the manufacturer’s contractual breach was, how much money it has actually lost as a result of the breach, or generally how poor in performance the manufacturer has been. Although prejudicial, none of this should impact on the legal consideration of the application of the limitation of liability.
4.60 What is clear, adopting the approach of the courts, is that a decision either way—confirming the cap applies and the maximum recovery would be £10 million or confirming the cap does not apply and damages could be much more—will not constitute a knockout blow and that to examine this issue as a preliminary point will not save costs overall if a settlement is not, subsequently, reached. There will, after all, still be the breach of contract issue to deal with as well as the actual damages to ascertain if the limitation on liability is broken.
4.61 However, from the parties’ perspective, to know if this is a £10 million capped case or not is the sort of information on which a risk assessment can be performed as to whether to settle and at what amount. Depending on the result, you can see how the settlement dynamics will be driven for each party. This is just the sort of preliminary issue that arbitrators should feel comfortable they have the power to order be dealt with even against one party’s wishes.
4.62 My second example involves a joint venture dispute as to the performance of each party under the joint venture agreement. One has purported to terminate the joint venture for the failure of the other to perform and has made a claim for the lost profits that would have been made by the venture but for the other party’s default. The legal and factual issues surrounding the performance issues of the partners are complex and will involve a great deal (p. 54) of documentary and factual evidence. However, it is alleged by the respondent that, even if it was in default (which is denied), the venture would never have made any money anyway, and that this can be established quickly and simply.
4.63 How many arbitral tribunals, against the wishes of the claimant, would be willing to take, as a preliminary issue, the question of whether the venture would have made any money? In other words, dealt with quantum of damage first, before any finding on liability? I would doubt many would take that approach, but I can say that I am aware of one situation where precisely that was done by the tribunal, which found there were no damages. Not surprisingly, that proved to be the end of the matter.
4.64 Donald Rumsfeld memorably said: ‘as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And it is the latter category that tends to be the difficult one.’10
4.65 At present, the unknown unknowns in the arbitral process remain unknown for far too long, all in the interests of having a single, all-in hearing of even the most unmeritorious claims, or of claims involving issues which could be separated out and dealt with at an early stage. Allowing strike-outs and permitting the early hearing of preliminary issues would help turn those unknown unknowns into known knowns and enable commercial clients to have a better idea of the risks involved in proceeding with the case.
4.66 It needs the rule-makers to take the initiative and give clear powers to arbitral tribunals, which are not subject to party agreement, in their rules; it needs arbitral tribunals to exercise their powers robustly; and it needs courts to uphold decisions made robustly in the exercise of those powers. Finally, of course, it does require the clients to take the risk of including in their contracts arbitration clauses providing for such rules to apply. I am certain, however, that more clients will be willing to take the risk of doing so at the time of entering into the contract than after the dispute has arisen.
4.67 Unlike the feeling I was left with in the US Supreme Court, after reading the brochure which said ‘this is your Supreme Court’, of not being sure whose court it was, clients need to be clear and sure that the arbitral process is their process and not a process designed for the convenience or comfort of others, so that there is no longer a need to ask ‘whose arbitration is it?’
4.68 And what happened at my Supreme Court hearing? Well, instead of getting a judgment on the issue that had been appealed from the Court of Appeals, we were asked by the Justices to submit briefs on another aspect of the case, which we duly did; and, six months later, I found myself back in the US Supreme Court for the first argument of the new judicial term. I knew the form this time, made my move quickly, and was able to get a seat only two rows from the front in the public seating area, and on the same side of the courtroom as my counsel.
(p. 55) 4.69 While I was waiting for the rest of the seating to fill up, and for the Justices to come in, I saw a gentleman approach one of the Marshal’s Aides and say ‘I am the petitioner in the case immediately following this one. Where do I sit?’ to which the reply was ‘Wherever you can find space, sir’.
3 ICC Case No 11413, First Interim Award (December 2001) (2010) 21 ICC Int’l Ct Arb Bull 34 and ICC Case No 12297, Procedural Order No 1 (22 August 2003), ‘Decisions on ICC Arbitration Procedure: A Selection of Procedural Orders Issued by Arbitral Tribunals Acting under the ICC Rules of Arbitration (2003−2004)’ (2011) ICC Int’l Ct Arb Bull, 2010 Special Supplement, 47.
6 ‘Current and Preferred Practices in the Arbitral Process: International Arbitration Survey’ <http://www.arbitration.qmul.ac.uk/research/index.html> accessed 25 September 2015.
10 Donald H Rumsfeld, ‘DoD News Briefing—Secretary Rumsfeld and Gen. Myers’, US Department of Defense (12 February 2002) <http://archive.defense.gov> accessed 2 February 2016.