Multiple issues in arbitration
October 2014 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
The growth of international commercial arbitration as an effective dispute resolution mechanism is in part due to the flexibility it allows, stemming from the fact that it is based on the consent of the parties. Parties can agree rules, timelines and procedural steps, such as the extent of discovery that will be allowed. With the increase in complex commercial arrangements involving multiple parties and interrelated contracts though, the fundamental need for all parties to consent to the arbitral process creates a challenge. Whilst it is practical and efficient to devise methods to determine all such interrelated disputes through common arbitration proceedings, the challenge for draftsmen and arbitral institutions is to find mechanisms capable of overcoming this fundamental principle: arbitration is a consensual process.
The necessity to join a third party to the arbitration proceedings may arise where there are interrelated or interdependent contracts between a number of parties involved in a particular project or transaction, such as in construction projects and other transactions where various aspects of the project are sub-contracted during the various phases. The challenge in this scenario is to ensure at the outset that all parties who might become party to a common dispute, perhaps arising from multiple contracts, have given their advance consent to resolve that dispute in a common arbitration proceeding.
The arbitral rules being followed must also provide a process for arbitrations (traditionally conceived of as a claimant versus a respondent) to instead proceed on the basis that there may be several different parties none of whose interests align. As essential part of this is a mechanism allowing for the joinder of third parties. The ICC Rules 2012 provide such a procedure in Article 7, which sets down a clear process for a party to an arbitration to seek to join an additional party by serving a Request for Arbitration on that party. Though this marked a significant and popular evolution from the ICC Rules 1998, it remains clear that the existence of an agreement to arbitrate between the applicant party and the joined party remains at the heart of the provisions.
The new LCIA Rules 2014 (which are effective from 1 October 2014) have also modernised the way in which the arbitral procedure contemplates that third parties may become parties to an arbitration, and Article 22.1(viii) of the LCIA Rules 2014 provides that the arbitral tribunal will have the power to allow third persons to be joined to an arbitration, provided that the third person as well as the applicant party have consented to the joinder in writing (this may be in the Arbitration Agreement, prior to the commencement of the arbitration). It remains to be seen whether the parties must have consented explicitly to the possibility of joinder, or whether a three-party arbitration agreement will suffice.
In addition to provisions allowing joinder of third parties encompassed in certain institutional rules, certain national laws permit the joinder of non-signatories to arbitration proceedings. Some of the scenarios when such joinder is permitted are when the non-signatory is a group company or alter ego of one of the parties to an existing arbitration.
However, even where the consent difficulty is overcome, a key challenge in a multi-party context is the principle that each party to the arbitral proceeding should be given an equal opportunity to be heard and to participate in the constitution of the arbitral tribunal. This issue was highlighted by the French Cour de Cassation in Dutco [Siemens AG and BKMI Industrienlagen GmbH v Dutco Construction Co. (Cour de Cassation (1re Ch. Civile), 7 January 1992]. That case decided that co-respondents who had been required (as a result of a fairly standard ICC clause of the time) to agree on a joint nominee as arbitrator and had done so under protest, had not been afforded their proper right to participate in the constitution of the tribunal. Equality of the parties in the nomination of arbitrators was a matter of French public policy, the right to which could not be waived after a dispute had arisen. The response of the arbitral institutions was to provide a fall back whereby if joint claimants or respondents failed jointly to nominate an arbitrator, the institution would choose an arbitrator on their behalf. This is seen for example in Article 12(8) of the ICC Rules 2012 (which broadly follows the principle from Article 10 of the ICC Rules 1998).
Where joinder is only generally possible before the constitution of the tribunal (unless all parties consent at the time), there are also provisions in the ICC Rules 2012 and LCIA Rules 2014 which contemplate the consolidation of existing arbitrations into one arbitral proceeding, even after arbitrators have been appointed in one or more of the proceedings. There are several reasons to want to consolidate arbitral proceedings involving common parties and issues. Aside from avoiding conflicting decisions on the same issues of law and fact, it is clearly likely to result in an expedited and more cost-efficient outcome. Two of the most common circumstances under which consolidation can take place are as follows. The first circumstance is when there are different arbitration agreements but where all of the relevant contracts contain arbitration agreements in precisely the same or at least similar terms, i.e., specify similar arbitral rules, are administered by the same institution and have similar procedural requirements including with respect to the appointment of the tribunal. However, where there are fundamental differences between these agreements, consent of all parties to the submission will need to be obtained. It is often possible to draft arbitration provisions in large projects with interconnected contracts such that the parties’ agreement to consolidation of related disputes is recorded in advance. The second circumstance is where the parties to the inter-connected contracts have all signed up to an umbrella arbitration agreement with the specified commercial terms being recorded in separate contracts.
Article 10 of the ICC Rules 2012 provides a mechanism for the ICC Court to consolidate two or more arbitrations pending under the ICC Rules at the request of any party. However, this is only permitted if the parties have agreed to such consolidation; the claims arise from the same arbitration agreement; or the arbitrations are between the same parties in connection with the same agreement; and the ICC Court finds the arbitration agreements to be compatible.
Article 22.1(ix) of the LCIA Rules 2014 allows the arbitral tribunal to order consolidation of arbitral proceedings only where all parties agree in writing and the LCIA Court has approved. Article 22.1(x) does extend the scope further than this by allowing consolidation by the arbitral tribunal of one or more other arbitrations commenced under the LCIA Rules absent consent in writing, so long as the arbitrations proceed under the same arbitration agreement or under compatible arbitration agreements between the same disputing parties, and so long as either no arbitral tribunal has yet been formed or, where formed, is composed of the same arbitrators. Approval of the LCIA Court is also still required. Therefore, the earlier that consolidation is addressed and considered, the more likely it is to be allowed. This is particularly so where parties to the arbitrations to be consolidated are not identical.
Of course, even if consolidation of arbitral proceedings is not possible due to delay or any other reason, parties to a subsequent arbitration may choose to appoint the same arbitral tribunal to determine their latter dispute. This may be attractive to ensure consistency between decisions. The risk, however, remains that the tribunal may reach a different conclusion based on evidence presented at the subsequent arbitration. The other hazard, especially in cases where parties to the subsequent arbitration are different from parties to the initial arbitration, is that the arbitration tribunal may be influenced by a submission or some evidence which a party in the second arbitration has not had the opportunity to address. A possible solution to this may be for the tribunal to hear both disputes concurrently.
Another important risk to be borne in mind when pursuing either joinder or consolidation mechanisms is the question of confidentiality. While such mechanisms increase efficiency and cost effectiveness of dispute resolution, they may in some circumstance raise concerns regarding the sharing of confidential material and information between parties who are not necessarily parties to the same commercial contracts and therefore not privy to the same commercially sensitive information.
While it is not possible to predict all potential dispute scenarios, effective drafting of arbitration clauses in commercial contracts is the best available solution to increase certainty and efficiency and avoid wasted time and costs when such disputes do arise. Arbitration clauses in complex commercial contracts should expressly provide for: (i) a clear delineation of the scope of the agreement; (ii) a method of constituting the tribunal ensuring that it is in compliance with the principle of equality between parties; (iii) the language and seat of arbitration; and (iv) the cut-off point after which parties may not be joined or disputes may not be consolidated.
Where issues of confidentiality are crucial, an umbrella clause may be required, containing the arbitration agreement but allowing other key and sensitive commercial terms to be documented separately.
It is of course essential to ensure that arbitral provisions across multiple contracts are identical or at least similar. This is very important if attempts to secure joinder or consolidation of proceedings are envisaged. In addition to the issues highlighted above, an arbitration award which is not the result of an arbitration founded on an effectively drafted arbitration agreement which clearly records party consent may result in the arbitral award being challenged and ultimately set aside in enforcement proceedings.
Sherina Petit is a partner, Matthew Buckle is an associate and Sneha Janakiraman is a trainee at Norton Rose Fulbright LLP. Ms Petit can be contacted on +44 (0)20 7444 5573 or by email: email@example.com. Mr Buckle can be contacted on +44 (0)20 7444 5054 or by email: firstname.lastname@example.org.
© Financier Worldwide
Sherina Petit, Matthew Buckle and Sneha Janakiraman
Norton Rose Fulbright LLP