The use of summary disposition in international arbitration: some observations
October 2014 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
The past decade has seen various proposals put forward to improve the procedural and cost efficiencies of international arbitration. One proposal that received significant attention was the summary disposition of an arbitration, i.e., the dismissal or upholding of claims or defences, in favour of a party, by arbitrators, without proceeding to a full evidentiary hearing on the merits. Constructive debate over this topic has, however, waned considerably in recent years. This is due, in part, to the perceived difficulties in reaching consensus among industry stakeholders on the framework for the implementation of this procedural mechanism in international arbitration.
This brief article does not seek to resolve the debate surrounding what would constitute an internationally acceptable framework for the implementation or application of summary disposition in the arbitral process. It instead aims to provide some observations on the utility of summary disposition in international arbitration, and ponders, by examining some of the commonly cited objections to its use, if arbitrators, legal counsel and arbitral institutions should perhaps be more willing to embrace or contemplate the use of such a procedural mechanism in appropriate cases.
Addressing frivolous claims and sham defences in arbitration
First-time participants in international commercial arbitration, particularly those familiar with court litigation processes, are often surprised by the absence of a summary disposition procedure in mainstream arbitration rules and laws. The arbitration rules of most of the major arbitral institutions, including the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the American Arbitration Association (AAA)’s International Centre for Dispute Resolution (ICDR), the Singapore International Arbitration Centre (SIAC), and the Hong Kong International Arbitration Centre (HKIAC), are silent on this issue, and do not expressly authorise arbitrators to utilise such procedures. Likewise, the arbitration laws of many of the popular arbitration jurisdictions, such as London, Paris, Singapore and Hong Kong, are generally silent on whether or not arbitrators are empowered to summarily dispose of a case without proceeding to a hearing on the merits. As a result, the available empirical evidence indicates that summary awards are rarely rendered. Anecdotally, a significant number of arbitrators are also reluctant, and in some cases hostile, to entertaining applications for summary disposition.
However, summary disposition procedures have long been applied, for the most part, by common law courts. For example, such procedures exist, in varying forms, in the civil procedural laws of the United Kingdom and the United States. While there are differences in the approaches adopted in various jurisdictions and the legal effect of the rulings arising out of such procedures, they are generally intended to address claims or defences that have no real prospect of succeeding as a matter of law or where the factual basis is manifestly fanciful, without the expense or delay of going through a full trial.
It is hard to justify, at first blush, why frivolous claims or sham defences cannot be dealt with summarily in international arbitration, unlike in many courts around the world. For example, debt claims are oftentimes the only claims that are advanced in an arbitration arising out of derivatives or similar financial transactions. In cases where there are no meritorious defences to such debt claims or they are undefended and yet have to proceed to a final hearing on the merits, frustration over the burden of increased costs and delay, and the resultant unfairness caused to the creditor, due to the perceived lack of a summary disposition procedure in international arbitration, can be appreciated. Indeed, the International Swaps and Derivatives Association (ISDA) has noted, during its consultation on the use of arbitration under the ISDA Master Agreement that serves as an industry template for over-the-counter derivatives transactions, that the absence of a summary disposition procedure in international arbitration is one of its disadvantages vis-a-vis court litigation. Equally, where it is clear that there are time limitation or res judicata or collateral estoppel issues that will result in claims failing as a matter of law regardless of the underlying facts of the case, most will agree that it will be unnecessary to proceed to a full hearing on all of the evidence, and after what may be a costly discovery phase, in order to decide the arbitration on its merits.
Cases with such characteristics, even if they form a small percentage of the total number of arbitrations in existence, therefore would seem to be well-served by the application of summary disposition procedures.
Due process concerns should not be an impediment if sufficient safeguards are incorporated
Perhaps the most common concern that has been expressed with the use of summary disposition in international arbitration is that it may subsequently result in a summary arbitral award being challenged, either via setting-aside or resisting enforcement proceedings under the auspices of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the UNCITRAL Model Law on International Commercial Arbitration, on the ground that due process or natural justice was breached by the arbitrators’ alleged failure to provide an adequate opportunity for a party to be heard or to present its case (and which may also be alleged as a breach of the underlying agreement to arbitrate, where the agreement did not expressly empower the arbitrators to summarily dispose of an arbitration).
This concern is appreciable when viewed against the final and non-appealable nature of arbitral awards (unlike summary judgments that, at least in common law jurisdictions, are typically subject to appellate review), but is perhaps overstated. It is hard to imagine a scenario where otherwise prudent and diligent arbitrators will expose their arbitral award to challenge by ‘jumping the gun’ and hastily dispose of an arbitration without having first provided the parties with an adequate opportunity to be heard. To the contrary, it is more likely that arbitrators who are inclined towards issuing summary rulings will take additional precautions to ensure that any due process concerns are properly addressed, such as by holding an oral hearing either in person or via telephone and seeking written submissions from the parties. In this regard, the International Centre for Settlement of Investment Disputes’ (ICSID) arbitration rules, which are often used for investor-state arbitrations, expressly provide for the summary disposition of claims which lack legal merit, and in practice typically involves both written and oral submissions before a determination is made by the arbitrators.
Provided there are sufficient procedural safeguards put in place, arbitrators therefore should not be unduly concerned about the subsequent risk of award challenge. Most modern arbitration laws and leading arbitration rules generally provide arbitrators with wide latitude regarding the conduct and procedure of the arbitration. For example, the 1996 English Arbitration Act grants arbitrators sitting in England and Wales broad powers to determine all procedural and evidentiary matters in an arbitration. Similarly, jurisdictions such as Singapore and Hong Kong, which have largely adopted the UNCITRAL Model Law in their international arbitration regimes, empower arbitrators to conduct the arbitration in such manner as they consider appropriate. The grant of broad arbitrator discretion in relation to the procedural conduct of the arbitration is also echoed across many institutional arbitration rules, such as that of the ICC, LCIA, AAA/ICDR, SIAC and HKIAC.
This is reinforced by the weight of the caselaw in jurisdictions that are ‘pro-arbitration’, where the courts have tended to be deferential, or minimally interventionist, towards an arbitrator’s exercise of his or her discretion with respect to the conduct and procedure of an arbitration. For example, the Hong Kong Court of Appeal, in Pacific China Holdings Ltd v Grand Pacific Holdings Ltd, held in relation to an application for the setting aside of an arbitral award that was rejected, that arbitrators in Hong Kong have a high degree of autonomy in their management of arbitrations and the Hong Kong courts will be reluctant to interfere with this autonomy except in the most exceptional circumstances where there was a serious and egregious breach of due process. This was subsequently affirmed by the Hong Kong Court of Final Appeal. The courts in Singapore have issued similarly robust judgments in this regard, affirming in a number of decisions relating to the setting aside or the resisting of enforcement of arbitral awards, that there would be “minimum curial intervention” by the Singapore courts in arbitral proceedings.
Frivolous or abusive applications for summary disposition can be deterred or punished with cost sanctions and other measures
Another concern that has been voiced with the use of summary disposition in the arbitral process is that this may result in the addition of another procedural layer to proceedings. Particularly where considerable time and resources have been spent on briefing an application for summary disposition that is then denied, the parties are then faced with continuing the arbitration, albeit having incurred additional cost and the prolonging of the proceeding. An ancillary concern is that such applications will become routine and commonplace in international arbitration, similar to the motions to dismiss that are often filed at the start of civil litigation in the United States federal courts.
However, the prospect of this happening should not, in and of itself, operate as a bar to the hearing of summary applications by arbitrators. Under the ‘costs follow the event’ or ‘loser pays’ rule of costs allocation that is generally followed in most arbitration jurisdictions, the party that loses an application for summary disposition can be ordered to pay part or all of the prevailing party’s costs in addressing the application. Further, arbitrators who consider that the application for summary disposition was frivolous, abusive, vexatious or otherwise intended to delay the expedient completion of the arbitral proceeding have, at their disposal, various powers to punish the errant party. These include the imposition of cost sanctions, either in its decision on summary disposition or as part of their overall decision on costs allocation at the end of the arbitration.
Given the complaints in recent years from corporate end-users regarding the growing length and spiralling costs of international arbitration, it would seem timely for arbitral institutions, arbitrators and counsel to refocus their attention on this procedural mechanism, and to address the perceived shortcoming that the use of such a mechanism, under most arbitration laws and rules, is, at best, an unsettled, and perhaps somewhat controversial, area in mainstream arbitration practice and procedure.
As a starting point, arbitration regimes and institutions may wish to clarify whether or not arbitrators acting under their auspices are empowered to summarily dispose of cases. While summary disposition will not be suitable or appropriate for many arbitrations (such as where there are contested issues of fact that require a full factual investigation and evidentiary hearing on the merits), the availability of such a procedural tool, whether be it expressly provided for in institutional arbitral rules or the arbitration laws of various jurisdictions, can, if used judiciously, enhance the ability of arbitrators to expedite the completion of arbitrations where a party’s claims or defences manifestly lack merit. It may also have the added benefit of deterring the filing of frivolous claims in arbitration. Such clarification may necessitate additional reform in certain areas, such as the methodology by which arbitrator fees are calculated where the case is summarily disposed. Further, it may be sensible for a group of widely-respected arbitration experts, such as the Working Party of the Arbitration Committee of the International Bar Association (IBA), to consider framing guidelines for the use of summary disposition in cases where there is no express agreement between the parties as to the use of summary disposition. The issuance of such default guidelines, even if not binding, will likely provide what will hopefully be much-welcomed clarification to arbitrators and counsel, particularly those who have trained or primarily practice in legal systems that do not provide for summary disposition, as to the circumstances where the use of such a procedure should be considered.
In the meantime, parties who wish to consider the use of this procedure, or conversely do not want such a procedure to be used, in any arbitration, would do well to address this issue when drafting their arbitration agreement.
Calvin Chan is counsel and Wilfred Ho is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. Mr Chan can be contacted on +65 6434 2910 or by email: email@example.com. Mr Ho can be contacted on +852 3740 6803 or by email: firstname.lastname@example.org.
© Financier Worldwide
Calvin Chan and Wilfred Ho
Skadden, Arps, Slate, Meagher & Flom LLP