To arbitrate or not to arbitrate – an expert’s observations
November 2017 | LEGAL & REGULATORY | LITIGATION & DISPUTE RESOLUTION
Financier Worldwide Magazine
November 2017 Issue
Businesses are turning increasingly to arbitration as their preferred method of dispute resolution, evidenced by a rise in the number of new cases and from the opening of new arbitration centres. In recent years, new centres have opened in the British Virgin Islands, Kigali, New York, Seoul and Karnataka, suggesting that the growth in arbitration is a global trend.
This is perhaps not surprising given the many potential advantages of arbitration which is frequently said to be a cheaper and quicker alternative to litigation. It has the additional benefit of confidentiality and affords the parties greater control over the process, not least the opportunity to be involved in the selection of the arbitration panel. A further perceived advantage is that the arbitrators’ decision is final with limited rights of appeal.
However, these features can be double-edged. In particular, the flexibility of the process and the ability of the parties to determine the range of evidence can lead to increased costs. In the absence of a judge and court enforced procedures, it is down to the parties to manage the arbitration effectively and limit costs, while ensuring a fair process and minimising the risk of a subsequent appeal.
Therefore, before entering into an arbitration agreement it is worth weighing the pros and cons of arbitration compared to litigation and understanding how best to manage the arbitration process.
The advantages and disadvantages of arbitration are ideally considered well ahead of time, even before a business relationship is even entered into. Many contracts include an arbitration clause which determines whether or not a dispute will be subject to arbitration. Such clauses are particularly common in agreements for the sale of businesses and can be very detailed in relation to any post-sale adjustments to the agreed purchase price.
Where such clauses are too widely drafted or terms are not adequately defined, this can result in disagreement between the parties over the interpretation of the clause. Further, any dispute not specified by the arbitration clause will be subject to litigation, although the parties can agree to opt for arbitration instead of litigation, should they so wish. Arbitration clauses therefore merit careful attention at the drafting stage to prevent subsequent disputes arising over their interpretation or application.
Once a dispute has arisen, cost is a key consideration when deciding whether to opt for arbitration and it is not always the case that arbitration is cheaper or quicker than litigation. While judges in civil courts are under pressure to limit the length of trials and reduce the volume of evidence presented, there is no such pressure on arbitrators. Although arbitration decisions are final and only subject to appeal under certain circumstances, where decisions are appealed, these appeals often relate to cases where the arbitrator has disallowed evidence or refused to hear evidence that one of the parties argued was relevant. Arbitrators are therefore unlikely to restrict the evidence presented by the parties and may also require an allocation of time to question witnesses directly.
In arbitration, responsibility for the management of evidence and timetabling therefore falls largely upon the parties, who must reach agreement on these issues. This can be problematic, for example where one party wishes to limit the number of witnesses on cost grounds and the other party perceives this as an attempt to exclude key evidence. These issues can be addressed to a certain extent at the outset through the wording of the arbitration agreement, for example by specifying the timetable, numbers of witnesses and volume of documentary evidence. Nevertheless, if the agreement is too rigid, it can cause problems at a later stage. For example, if one of the parties identifies a witness not anticipated in the arbitration agreement.
Arbitrations are also commonly used to resolve disputes between parties in different jurisdictions, often resulting in hearings taking place in far-flung locations. Parties should not underestimate the impact on costs of flying in witnesses and legal teams for extended time periods. Scheduling difficulties in relation to the arbitrators and the chosen centre of arbitration can also increase the overall length of the process, while the lack of a court-enforced timetable may result in extensions to deadlines, again increasing time and costs. This can be avoided by the parties agreeing in advance that deadlines cannot be moved other than in extreme circumstances and by both parties requesting that the arbitrators strictly enforce the timetable.
The process of selecting arbitrators can take longer than envisaged, adding significantly to the overall length of proceedings. The selection process is usually defined in the arbitration clause of the governing contract and typically involves the parties agreeing on the key qualifications and experience required, to the extent that these are not specified in the arbitration clause. Suitable candidates are then identified and the parties negotiate until agreement is reached as to the individuals to be selected. In identifying suitable arbitrators it is often useful to canvas the opinions of your legal advisers as well as other business contacts. While industry knowledge is often considered key, other attributes such as an ability to distil quickly issues from large amounts of information and excellent communication skills are also highly desirable.
Appointment of a single arbitrator has the benefit of reducing costs and simplifying the process, but often a panel of arbitrators is preferred, especially in complex matters where the stakes are high. A panel typically comprises three arbitrators, with each party selecting one arbitrator, and those arbitrators then jointly selecting the third. The third arbitrator selected will often be a lawyer rather than an industry expert. It is, therefore, not unusual for the parties to focus on industry knowledge when selecting their preferred arbitrator.
In addition to the number of arbitrators, there is a high degree of flexibility in the format of the arbitration. For example, for less complex or lower value disputes, costs can be minimised by limiting evidence to written submissions to a single arbitrator, rather than holding an oral hearing. Written submissions can be particularly useful where the subject matter is of a technical nature, such as the interpretation of accounting rules, and there is little reliance on witness evidence. Where witness evidence is key, an oral hearing is preferable as it allows the witness to be cross-examined and the arbitrator more easily to evaluate the weight of the evidence.
Often, the parties will present expert evidence to provide an opinion on industry specific or technical issues or on the quantum of the claim. However, experts can have other roles in an arbitration and if expert evidence is likely to be the determining factor, it may be useful to appoint an expert adviser to assist in the background, in addition to expert witnesses. An expert adviser is not subject to the same constraints as an expert witness and, for example, does not have a duty to the tribunal and can advise freely on the strategy of the case. An expert witness may also be appointed by the arbitrators rather than the parties, for example to assist the tribunal in understanding specific technical or industry related issues.
Arbitration has many advantages over litigation, particularly confidentiality, which is not guaranteed in a court. However, the flexibility it affords can lead to increased costs and evidential risks where the process is not adequately controlled. Conversely, presenting a well-managed case may encourage settlement negotiations and avoid the risk and expense of a hearing. A well-drafted arbitration agreement, therefore, can mitigate risk and may even increase the odds of success.
Vicky Richards is a director at Duff & Phelps. She can be contacted on +44 (0)20 7089 4930 or by email: firstname.lastname@example.org.
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