“Arbitration as a concept is hundreds of years old and was designed by trading men who would get other tradesmen to arbitrate for them to resolve disputes, with the idea that it was quick, efficient and low-cost. Then lawyers got hold of it…”
So says Clyde & Co global arbitration co-chair Peter Hirst, who led a roundtable focused on international dispute resolution at The Lawyer’s General Counsel Strategy Summit in Spain. He provided a practical guide to help general counsel through the process.
Although lawyers may have complicated arbitration somewhat since they got involved in the process, there is now an effort on behalf of arbitration organisations to reverse that trend and bring back efficiency, value and speed.
Danger of champagne clauses
The reason why parties choose to arbitrate is because they are dealing cross border, and they want to find a neutral venue in which to resolve their disputes. It is consensual – you can only arbitrate if both parties choose to do so – it is confidential, and it is enforceable across the world.
The importance of getting arbitration clauses right was discussed in detail. They are usually the last clauses inserted in the contract and are known as ‘champagne clauses’ because they are added just before midnight when the champagne is ready to be popped. Unfortunately, that can lead to the drafting of clauses that just do not work. “We spend an enormous amount of our clients’ money and an enormous amount of time and energy looking at arbitration clauses and defining what they actually mean,” said Hirst.
“It is vitally important that you choose an arbitrator that is sufficiently strong and that your agreements are clear about what you want” – Peter Hirst
“The clarity of an arbitration clause is vital, so if you are involved in the drafting you should really take the time to think about it. There are many arbitral institutions and they all have model clauses that you can take if you need to. I would exercise some caution before simply cutting and pasting them, but they are always available – as are your lawyers if you need advice.”
One area where clauses frequently throw up problems is where lawyers have added phrases like ‘you will negotiate in good faith’ – leading to the danger that accusations of not negotiating in good faith get thrown around and you cannot move on to the next clause, added Hirst’s colleague, Clyde & Co partner Maurice Kenton.
The arbitration will always be subject to the supervision of the court. The question is, which court? That will be typically agreed by the parties themselves, who will agree where the arbitration will be seated. “It’s very important to choose your seat carefully,” says Hirst. “We had a case recently where the contract was silent as to governing law, that said that force majeure would be interpreted in accordance with the Brazilian civil code, and that the arbitration would take place in Paris in accordance with the laws of New York. That is the classic champagne clause where it will take thousands of dollars to work out what it means. If you get your language wrong, it can have bad consequences down the line.”
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With the exception of certain Middle Eastern states, it is permissible to select a seat of arbitration in one country and have it take place in another one. This is often used for conflict countries such as Libya, where the arbitration takes place under Libyan law but the seat is elsewhere.
Reducing cost and increasing speed
One of the down sides of arbitration is the cost and with that in mind, the International Chamber of Commerce (ICC) has introduced a ‘fast-track’ arbitration for disputes of less than $2m. In such cases, the court of the ICC will appoint the arbitrator, and may or may not accede to a hearing. “It’s not necessarily the case that a $2m case isn’t complex or important but you could find yourself railroaded into this fast track process,” said Hirst. Parties can opt out of the fast-track – if they have written it into their contract beforehand. “That is why, if you are simply pasting clauses from the internet, you need to be careful,” explains Hirst.
Institutions are adopting other procedures that tend to speed things up. “We are starting to see things like summary judgments being brought in, which is something that arbitrators have shied away from for years previously,” said Kenton. “That has been welcomed, in the main, as some people do arbitrate because they want to slow down the whole process.”
Some businesses are also taking their own steps to save money and time by using clauses to set tiers and caps on how long arbitration should take depending on the value of the dispute. One of Clydes’ clients included a clause to say that any arbitration should be resolved within 90 days. “That was great because it was resolved really quickly and it was cost-efficient,” said Hirst.
“If you compare that with other war stories, I had an arbitration that started in 2009, and finally concluded in 2011, but it took another three years for the arbitrators to actually give the award,” added Kenton.
Arbitration is usually conducted by either one or three people. “The costs do treble when it’s three,” Hirst advised. “Getting the diaries of three busy arbitrators synchronised is difficult, so when drafting your clause, you should think about that. It’s a key point: do I want three arbitrators, and if so, why?”
Litigation’s poor relation?
One general counsel shared a bad experience of arbitration: “We had an arbitration clause in a contract which we activated, and I found the living of it to be very different to the promise that it would be quick and cheap,” she said. “Actually, it felt like litigation’s poor relation.”
“I think I felt missold,” she added. “If it had been clear up front that the level of pain would be comparable to litigation that would be one thing, but the sales pitch I was given was, ‘This is the clause that gives you a quick and easy way of solving the dispute’.”
It is a fair comment, Hirst conceded. “It can be that the choice of arbitrator, or the way the opposing lawyers are pursuing their points, means that it turns into litigation in miniature. That’s why it’s vitally important that you choose an arbitrator that is sufficiently strong and that your agreements are sufficiently clear about what you want.”
Arbitration brings together different cultures, which can be challenging. “I was talking about disclosure with a Russian lawyer,” said Kenton. “He said to me, ‘You have to accept that our approaches to disclosure are fundamentally different. You could get struck off for failing to disclose a relevant and material document that you know about, whereas I might get sued for professional negligence for giving it across’.” Likewise, if the legal culture in a certain jurisdiction is to argue every point, no matter how small, proceedings can be slowed down considerably.
“In arbitration’s defence, there are ways to avoid the most painful scenarios,” Hirst advised. “You can specify in your clause that it will be resolved in three, or six, or nine months – whatever you choose.” There is the added advantage that while “in litigation you can have an appeal, and then an appeal of the appeal, in arbitration, that is most unlikely.”
And, of course, there is the question of privacy. The general counsel admitted that her arbitration had been in relation to a sensitive topic. Whatever tough questions her CEO might have asked about the pain arbitration had caused, at least the company’s dirty laundry had not been dragged through the courts.