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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
The user of arbitration is an important economic, legal and necessary fact. Economically, because it is not the ICC Court of Arbitration that pays the fees and expenses of the arbitrators but the users of international arbitration, and it is also the users who pay the administrative fees of the ICC. And who pays the lawyers as the parties' legal representatives in the arbitration? It is again the users or, increasingly, the users' insurers and funding agents. Legally, because without users as disputing parties there could be no dispute referable to arbitration. Finally, if users settled their disputes amicably, there could be no arbitration or award. In short, users are a necessary fact to every international arbitration: it is their arbitration.
Accordingly, in practice and theory, users and lawyers should share substantially the same interests, because the latter's clients lie at the heart of the arbitration. To a material extent, at least objectively, many of these identical interests are shared by arbitrators and arbitral institutions. In reality, as we all know, this is not quite so.
Increasingly, most one-off users agree to international arbitration unwittingly or with less than fully informed consent. With the emergence of a dispute, users may appear fleetingly at the origin of the arbitration, and they may then attend the first procedural meeting, if held in person, to sign the terms of reference and influence, marginally, the timetable for the arbitration. Thereafter, users generally disappear behind their lawyers into an arbitral form of Siberian exile. It is not that users, in the field of international arbitration, are treated as customers who are always wrong or less than right. It is more a case of the vanishing user, leading to an assumption that users' interests are exactly the same as lawyers' interests. It need not be so-and it used not to be so.
My first arbitration, about a sewage farm in the desert many decades ago, took place in a country in the Persian (or Arabian) Gulf. It was a building dispute between the contractor, a well-known local construction company, and the employer, the Ministry of Public Works of that country. There were no factual witnesses, because the two individuals most familiar with and mainly responsible for both the building project and the dispute had been appointed as the two arbitrators for the contractor and the employer, namely the contractor's chief executive officer and the Ministry's chief engineer. The hearing was commendably short, and the arbitration quickly concluded with an award, which unsurprisingly was not unanimous. It seemed to reflect the decision of the third arbitrator, an electrical engineer, who no doubt thought it useful to hear privately, first-hand, from those most knowledgeable about the project and the parties' dispute. The award was fair; and the arbitration was regarded as a success by both users. Because this was my first arbitration, I assumed that this was how most international arbitrations could be conducted: by the users, for the users and, of course, with the informed consent of the users. I soon learnt that this was a very unusual form of arbitration, viewed with horror by most other lawyers who knew of it. Such an arbitration, even by consent of the users, could probably not be held even under existing arbitration rules. Even if it could survive the application of the new ICC Rules, it could not survive the English Arbitration Act 1996, nor French law.1 And so, over the years, I learnt that international arbitration has surprisingly little to do with users, beginning with the drafting of arbitration agreements long before any dispute. Again, that was not always so.
There is an early 19th century case in the English courts about the great Anglo- French architect and engineer, Isambard Kingdom Brunel (1806-1889), the celebrated builder of steamships, bridges, tunnels and railways. He was also a great entrepreneur and businessman, and as the employer (of which he was at least a shareholder), he regularly drafted an early form (almost) of the FIDIC Conditions of Contract. For his grand projects, the agreement between the employer and the contractor appointed in advance as arbitrator of all disputes the engineer nominated by the employer who best knew the employer's mind, namely Brunel. The law reports record a challenge by the contractor against the employer engineer on the basis that the engineer (Brunel) was necessarily dependent upon and partial towards the interests of the employer. That challenge was rejected by the House of Lords, notably because the contractor had agreed to the engineer in advance in the contractual documentation. Given that agreement between the two users and Brunel's undoubted reputation as a true gentleman and a great engineer, the English court was content to leave him to decide all disputes under the agreement.2 At the time, the idea of appointing the two users as co-arbitrators, let alone one user as sole arbitrator, worked successfully with the users' consent. We probably cannot re-introduce today the practices of those good old days. Form has overtaken substance in many parts of our lives, and arbitration is much more adversarial and is now played for much higher stakes. In a more recent case, we see a different situation where interference in the separate relationships between the users, the lawyers and the arbitrators can prove fatal to an arbitration.
In the Turner case, there was a dispute-well known at the time but since happily resolved-about the right of foreign lawyers to represent a foreign party in a Singapore arbitration, without the risk of arrest, injunction or deportation by the Singapore authorities.3 In that case, the sole arbitrator was also removed for misconduct by the Singapore court. He was an experienced arbitrator (not a the role of users lawyer) and a former president of the Chartered Institute of Arbitrators. There were several grounds for a disgruntled party to challenge him, one of which was his attempt to go over the heads of the apparently bickering lawyers and their seemingly interminable procedural wrangles by writing directly to their clients, the users. For that conduct, treated as misconduct but readily understandable in other contexts, this sole arbitrator was admonished and removed from office by the Singapore Court. It seems that the interests of the users in that arbitration were not universally shared by all their lawyers, and that the interests of certain of these lawyers were treated with greater deference by the Singapore Court. It remains a puzzling decision and a cautionary tale: it suggests that an arbitrator should not second-guess the interests of users as represented by their lawyers during the arbitration.
As far as drafting agreements is concerned, we know from practical experience that at the conclusion of successful commercial negotiations, users often pay little attention to the drafting of a specially tailored provision for the best resolution of any future dispute relating to their transaction. Understandably, the parties appear to take legal advice late, and then those lawyers choose a standard system of dispute resolution, readily available and easily known to them as arbitration rules, the ICC, LCIA, IRDC, SCC, SIAC or, increasingly, UNCITRAL. This significantly reduces the risk of pathological arbitration clauses; but it has also removed the influence of users on the drafting of their own arbitration clauses in favour of standard form arbitration rules that have traditionally been drafted by lawyers, not users.
In recent times there have been several attempts to involve users, most notably by those responsible for drafting the new ICC Rules.4 What is surprising is that when users are consulted on the drafting of arbitration rules, they seem to be conservative and cautious. In recent rule reforms, users have significantly not insisted upon or even proposed radical changes to arbitration rules. For example, let us look at the factors that affect users most in any arbitration: the heavy costs, efforts, disruption and delays of wide-ranging document production (or "discovery"). Why do none of the most used arbitration rules provide for arbitration without any form of document production? Why is it that before a dispute users still seem more concerned to have in existence a rule-based right to document production rather than specially tailored procedural rules more appropriate to their particular transaction, trade or future dispute? We know that this point was raised in the reform of the new ICC Rules, but users, when consulted, preferred the safety of familiar habits. Or is this, again, a case of users consulting their own lawyers and identifying their views and interests with theirs out of an abundance of caution?
Under many domestic arbitration rules, small claims procedures preclude oral hearings and/or oral witnesses and require the dispute to be decided on written submissions only, by consent of the users expressed in advance of their dispute. In London, the LMAA Small Claims Procedure has proved successful with both domestic and international users of maritime arbitration in London. This is obviously not a procedure for large claims-nor indeed for complex small claims- but why is it assumed by users to be inapplicable to all other international disputes? Given the high costs of hearings in international arbitrations, why is it so rare to see an arbitration conducted without hearings or at least without any oral witnesses? Hearings add massively to the costs of an arbitration, and it is a sad fact of life that many lawyers will advise a client not to pursue a claim by means of international arbitration if the amount is less than a certain figure. In London, 10 years ago, we inquired of several City firms what this figure was for ICC and LCIA arbitrations. It ranged between USD 3 and USD 5 million then; and it must be higher now. If so, this is regrettable. It does not seem right for claimants to be disenfranchised from making relatively small claims by means of international arbitration, and it seems more than regrettable that a possible cure, an adjusted procedure, could not be developed to make international arbitration possible even for very small claims. Something seems to be wrong. If the most ambitious solutions cannot prevail, let us start with a relatively small reform.
For many users, the new imperative is to win their arbitration at almost any cost. The allocation of costs against the losing party by the tribunal is therefore an important weapon in the arbitral armoury that few users would wish to abandon (the so-called ABBA principle: "the winner takes it all"). However, as regards costs incurred from the first procedural meeting to the award, we again see the absence of users' direct input in the arbitration process. This is even more surprising given that every international arbitration conducted between users and lawyers of different background is itself an exercise in comparative procedure, requiring flexibility, compromise and a methodology best suited to that particular arbitration. There should therefore be an important role for all users as regards costs: not only the costs of the arbitrators and the arbitral institution but also the far greater legal costs and expenses payable to the users' own lawyers, experts and witnesses, all compounded twice over by the application of the loser-pays-costs rule.
Why not, therefore, place a user-agreed cap on the total legal costs of the arbitration at the outset of the arbitration? This cap could work in two ways. For large claims, it would at least prepare both sides at the outset (i.e., the actual users as distinct from their lawyers) for what could be a significantly high bill for legal costs (compounded twice over). The mutual of that potential liability could persuade parties to come to an amicable settlement. In more modest cases, where the quantum of the claim is relatively low, it would be important for the users to decide at the outset, by agreement with the tribunal, to keep legal costs at a level proportionate to the amount of the claim. It is notorious that, for a relatively modest claim raising no fundamental principles, users can spend a far greater sum in legal costs to recover the lesser sum in dispute.
Such cost-capping was introduced in England under sections 63 and 65 of the Arbitration Act 1996. Under section 63, parties are free to agree what costs of the arbitration are recoverable as between themselves; and under section 65, unless otherwise agreed by the parties, the tribunal may direct that the recoverable costs of the arbitration (or any part of such costs) shall be limited to a specified amount.5 The first provision depends upon the parties' consent, but the second depends on the tribunal only, with no need for the parties' consent. There was no counterpart to these provisions in the 1985 UNCITRAL Model Law, and the Department advisory Committee (DAC) on the Law of Arbitration recorded its legislative intentions, as follows:
"We consider that such a power, properly used, could prove to be extremely valuable as an aid to reducing unnecessary expenditure. It also represents a facet of the duty of the tribunal as set out in Clause 33 [i.e., the tribunal's mandatory duty 'to adopt procedures suitable to the circumstances of the particular case avoiding unnecessary delay or expense…']. This power enables the tribunal to put a ceiling on costs, so that while a party can continue to spend as much as it likes on an arbitration it will not be able to recover more than the ceiling limit from the other party. This will have the added virtue of discouraging those who wish to use their financial muscle to intimidate their opponents into giving up through fear that by going on they might be subject to a costs order which they could not sustain."6
This provision in section 65 has been used surprisingly little by English tribunals. The same applies to the use of section 63 by parties, but in recent difficult economic times there was renewed interest in its application.7
In 2009, the London Maritime Arbitrators' Association (LMAA) in its new Intermediate Claims Procedure (ICP) for LMAA arbitration disputes addressing claims between USD 50,000 and USD 400,000. This procedure provides for a specific cap on legal costs: "The parties' recoverable costs are to be capped so that neither party shall be entitled to recover more than the sum equivalent to 30% of the claimant's monetary claims as advanced plus the amount of a counterclaim, if any." If there is an oral hearing, the percentage increases from 30% to 50%. This new provision concludes: "These percentages are maximum figures, and the tribunal may at any time in its absolute discretion cap the parties' future costs so that the total cap amounts to some lesser percentage than is here stated." Could similar cost-capping work for international arbitrations? It could certainly provide an element of confidence for users who are nervous about the allocation of legal costs according to the loser-pays principle or about the disproportionate amount of legal costs. For ICC arbitrations, the initiative would have to start by consent with tribunals and parties at the first procedural meeting in clearly appropriate cases. However, if it did work in practice, it could be considered in the future as a possible change to the new ICC Rules and other arbitration rules currently being revised by other institutions.
But could this really work in practice? Can any major reform ever be introduced by users of international arbitration? The likely fate of the LMAA's ICP rules may provide a salutary lesson: they are about to be abolished as a result of opposition by maritime users. This is the place where, it seems, the interests of users and lawyers do diverge, not for reasons of self-interest or financial greed, but because users are essentially even more cautious and even more uncomfortable than lawyers with what is unknown, unfamiliar and as yet unproven-all traits that bend towards orthodoxy rather than radicalism. As St Augustine, here the patron saint of arbitral users (almost) said: "Grant me innovation and reform in the new ICC Rules, only not yet."
1 See, for example, the recent decision of the Cour d'appel de Reims of 2 November 2011 in Avax v. Tecnimont.
2 Ranger v. Great Western Railway Co. (1854) 5 HL Cas 72, 10 ER 824 (HL).
3 In the Matter of an Arbitration between Builders Federal (Hong Kong) Limited and. Joseph Gartner & Co. v. Turner (East Asia) Pte Ltd (1988); see also Michael Polkinghorne, 'The Right of Representation in a Foreign Venue' Arbitration International 4 (1988) p. 333.
4 The high-water mark among modern arbitration rules was contained in the LCIA's 1985 Rules: "The parties may agree on the conduct of their arbitral proceedings and they are encouraged to do so…" (now Article 14.1 of the LCIA's 1998 Rules).
5 Section 65 states simply: "Unless otherwise agreed by the parties, the tribunal may direct that the recoverable costs of the arbitration, or any part of the arbitral proceedings, shall be limited to a specified amount. Any direction may be made or varied at any stage, but it must be done sufficiently in advance of the incurring of costs to which it relates, or the taking of any steps in the proceedings which may be affected by it, for the limit to be taken into account."
6 See the DAC's First Report (January 1996) para. 272; Mustill & Boyd: Commercial Arbitration: 2001 Companion Volume (2001) p. 439.
7 It has attracted attention even outside England. See Daniel Wehrli, 'Zum Höhe und Umfang erstattungsfähiger Parteikosten', DIS-Materialen X (2005) pp. 77-78.