Institutional arbitration with its emphasis on fixed time lines and institutional oversight over the process seeks to provide a plausible solution to the ills afflicting arbitration in India. Read on to know more about the advantages of using institutional arbitration as a way of resolving disputes
An overarching trend discernible over the past few years in the field of arbitration has been that corporate counsels are increasingly writing institutional arbitration clauses into their commercial contracts. This trend or preference has been well documented in the research conducted by Queen Mary School of Arbitration, University of London in 2006 and 2008. The report of the 2008 study, International Arbitration: Corporate Attitudes and Practices, 2008 revealed that 86 per cent of the participating corporate counsels preferred institutional arbitration over ad-hoc arbitration, which preference is reflected by the huge increase in the workload of the major arbitral institutions in the world. The London Court of International Arbitration (LCIA) in London saw its case load increase from 220 odd cases in 2008 to nearly 300 cases in 2010; the SIAC saw 160 cases being referred to it in 2009, up from 99 in 2008 and the ICC saw its case load jump from 663 in 2008 to 793 in 2010.
The USP of resolving disputes through arbitration is its relative speed and cost effectiveness. However, these virtues are facing considerable strain in India today. Although the ‘new’ Arbitration and Conciliation Act, 1996, aims at creating a legal framework to facilitate arbitration as a fair, efficient and cost effective alternative means of dispute resolution, unfortunately, as things stand today, arbitration in India has come to mirrorlitigation when it comes to speed and cost effectiveness. This could be attributed to the fact that the large majority of arbitrations in India are ad-hoc arbitrations. Anecdotal evidence seems to suggest that up to 95 per cent of arbitration in India go the ad-hoc route, characterized by the lack of predetermined procedural rules, coupled with the absence of institutional administration and oversight, and resulting in protracted and expensive proceedings.
Though not a panacea, institutional arbitration with its emphasis on fixed time lines and institutional oversight over the process seeks to provide a plausible solution to the ills afflicting arbitration in India. And, arbitral institutions are in a great position to influence the arbitration process in terms of time and cost through their arbitration rules, and also through their periodic practice notes and guidelines.
How and why, according to you, institutional arbitration has the potential to steal a march over ad-hoc arbitration?
Institutional arbitration has several clear advantages over ad-hoc arbitration. Its main advantage is that it increases the efficiency of the arbitral process by its comprehensive coverage of fundamental issues within the arbitral process. This gives the arbitration process a degree of predictability, both in terms of predictability in achieving certain procedural outcomes, as well as predictability of timeframes involved. For example, it is often the case that parties in an arbitration cannot agree to the choice of arbitrator to hear the dispute. In an ad hoc arbitration, the parties would have to rely on the lexarbitri, which often means that they would have to go before the national Courts to decide on the selection of the arbitrator. This process can be time consuming, coupled with the additional problem that national Courts are often ill-equipped to make such selections. Institutional arbitration however provides both a mechanism and a timeframe for the selection of arbitrators, thereby creating certainty and avoiding delays. Typifying the approach, the SIAC Rules for instance provide that if the parties cannot agree to the appointment of a sole arbitrator within 21 days of the receipt by the Registrar of the Notice of Arbitration, the Chairman of the SIAC shall make the appointment as soon as practicable. Through such mechanisms, the arbitral process cannot be stalled by the absence of agreement by the parties. Other advantages of institutional arbitration include providing professional administration of the arbitration, which sometimes includes scrutiny of the awards, and lending weight to the arbitral process and the subsequent award through the reputation of the arbitral institution concerned.
Could you please from your experience tell how and why institutional arbitration can remain impartial in all situations?
Impartiality of the arbitral process in institutional arbitration is ensured through the mechanism for the selection of arbitrators as enshrined in the rules of the respective arbitral institutions. Arbitral institutions draw from established databases to source for the appropriate arbitrator for the dispute in question. Some institutional rules contain specific provisions preventing arbitrators of a common nationality with any of the parties from being appointed, so as to prevent bias. In addition, institutional rules also often contain specific provisions for arbitrators to sign a declaration as to their independence. These are important procedural safeguards to foster impartiality in the arbitration process, none of which is applicable to ad-hoc arbitrations.
Increases in cost and time are linked and can in many respects be viewed as two sides of the same coin. An increase in time almost inevitably leads to an increase in legal and arbitration costs. In today’s business environment where legal costs are treated no different than any other business overhead cost, one of the greatest challenges facing arbitration in India is the complaint that the process has become too expensive.
Be that as it may, it would be useful at this stage to analyse the nature of the costs incurred by parties in an averagearbitration proceeding. In 2007, the International Chamber of Commerce (ICC) Commission on Arbitration published an excellent report titled, “Techniques for Controlling Time and Costs in Arbitration.” The report, which was based on ICC statistics, revealed that eighty two percent of the total costs in arbitrations were legal costs, which included lawyers’ fees and expenses, expenses relating to witness and expert evidence; sixteen percent were arbitrators fees and expenses; and the administrative expenses of the institution accounted for two percent of the total cost. Similar were the results of a survey conducted by German arbitrator Klaus Sachs in 2006 (reported in an article Time and Money), saying that approximately 85 per cent of the costs involved in arbitration related to legal fees with the remaining 15 per cent relating to arbitrator costs and administrative expenses of the institution.
Therefore it stands to reason that any attempt at reducing the cost of arbitrations should concentrate on measures at reducing legal costs. Notwithstanding thefact that a large percentage of the total costs are legal costs, arbitral institutions play a very important role in promoting economy and celerity in arbitrations.
In the absence of agreement by the parties on the constitution of a tribunal, the quickest and most cost effective way to constitute an arbitral tribunal is to delegate the role to an institution. Institutional rules contain detailed rules on the process of appointment of arbitrators, which saves the parties the hassles of approaching a court of law to appoint an arbitrator, which is most often the case in ad-hoc arbitrations. Given the mounting pendency of cases clogging the Indian public justice system, experience shows that courts take on an average anywhere between six to eighteen months to dispose off an application for appointment of an arbitrator.
Besides being impartial and independent of the parties, arbitrators under the institutional rules have to confirm their ability to devote sufficient time to ensurethe expeditious conduct of the arbitration (Article 5.3(b) LCIA India Arbitration Rules, 2010, hereinafter LCIA India Rules). Before confirming the appointment of an arbitrator, most institutions conduct a conflict of interest audit, which inter alia requires of arbitrators to sign a declaration to the effect that there are no circumstances known to the arbitrator likely to give rise to any justifiable doubts at to his independence and impartiality (Article 5.3(d) LCIA India Rules). Also, with a view to ensuring cost effective and speedy proceedings, the rules of most institutions provide for the appointment of a sole arbitrator. However, in the absence of any parties agreement to the contrary, or where in the view of all the circumstances of the case, the institution determines that a three member tribunal would be more appropriate.
“Tantvautl’arbitre, tantvautl’arbitrage” is an old French saying which translates in English as “An arbitration is only as good as the arbitrator”. Choosing the right arbitrator/s is critical to ensuring that the process is conducted expeditiously yet in conformity with due process. Institutions maintain extensive databases of arbitrators which include historical performance of arbitrators, allowing them to propose the most effective and best-suited arbitrator for the dispute referred to them.
An arbitrator’s diligence or the lack of it is taken into account by institutions in the final determination of the arbitrator’s fees, which effectively disincentivizes arbitratorsfrom prolonging proceedings. Under LCIA India procedures, no payment is made to arbitrators until LCIA India has satisfied itself that the arbitrators’ fees are reasonable in the circumstances of the case and in the light of the agreed timetable. It also encourages arbitrators to ensure that all expenses are reasonably incurred and in a reasonable amount.
How and why an institutional arbitration has the potential to seal a march over ad-hoc arbitration?
In institutional arbitration, there is a certainty as regards the procedural rules to be followed, infrastructural facilities that will be provided, a panel of arbitrators to be appointed from, etc., unlike adhoc arbitration which provides for none of these. Also it may seem that ad-hoc arbitration is cost friendly, however, the realty is far from it. In our experience, institutional arbitration has adequately developed as a speedy and cost-effective mechanism for resolution of commercial disputes (whether domestic or international). Furthermore, the possibilities of the any court setting aside an award passed by the arbitral institutions is minimal due to their high degree of legal and technical analysis.
Could you please from your experience tell that how and why institutional arbitration can remain impartial in all situations?
During institutional arbitrations, we have experienced that even in ex parte proceedings; the arbitral tribunal takes on itself the burden of examining the case from a neutral angle and goes a step forward in questioning the party present before it in a similar manner as would have been the case if both the parties would have been present. This to our mind is a sure shot sign of institutional arbitration being impartial. We are yet to see tribunals set under institutional arbitration acting in a biased or impartial manner while conducting the arbitration proceedings, for the very reason that if impartiality is established, it would affect the record of the arbitrator and would also tarnish the image of the institution. Also the arbitrator’s name may be removed from the panel of arbitrators of the institution.
What according to you aids the arbitration scenario in the country and because of which corporates have again started relying on arbitration itself?
In the last five years, there have been steps taken by the Indian Judiciary and the Executive towards making India a pro arbitration nation. Last couple of years we have also witnessed the handing down of judgments where the Indian courts have shown reluctance to interfere in cases where valid arbitration agreement exists. Also with an increase in cross-border transactions, parties have shown an unwillingness to subject them to any country’s litigation, and hence have chosen arbitration as a means of dispute resolution. Also certain noteworthy provisions of various arbitral institutions like emergency arbitration provisions to order urgent interim measures, as also provisions for complex arbitrations have compelled the corporate to have faith in arbitration. Also the fact that arbitration process gets wound up quickly and is one of the many reasons that corporates have now started relying on arbitration.
Many procedural delays in arbitration arise out of bad contract drafting. An ill-drafted arbitration clause can add significantly to the cost and time of arbitrations. As Diana Droulers, in a speech delivered at the IX Biennial IFCAI International Conference held in Delhi in 2007, put it,
“The arbitration clause is your door to an efficient arbitration, if your door does not open well, be it due to the fact that the hinges are not well oiled or the lock is faulty, you will not be able to get into arbitration and this is what an ill-drafted arbitration clause does.”
Here’s a classic example of an ill drafted arbitration clause, “The arbitration shall be conducted at the Singapore International Arbitration Centre (‘SIAC’) in accordance with the following arbitration rules (as then in effect) (the ‘Rules’): Rules of the International Chamber of Commerce (‘ICC’).
(Insigma Technology Co Ltd v Alstom Technology Ltd [2009] SGCA 24)
It is, of course, fortunate that in this specific case the Singaporean Supreme Court managed to give meaning to and enforce this ill-drafted arbitration agreement. However, the parties eventually lost time and money, as they had to resort to two rounds of litigation in the courts before finally starting the main arbitration proceedings.
Most arbitral institutions have devised standard clauses which incorporate the basics and have been tried, tested and perfected over the years. When in doubt, parties would be well advised to stick to standard institutional clauses.
Most parties and arbitrators often approach arbitration with the assumption that there will be hearings regardless of thenature of the dispute. However, oral hearings are not always necessary and arbitrations can be resolved on the basis of written submissions and documentary evidence. The rules of the leading arbitral institutions do provide for a documents only procedure (Article 19.1 LCIA India Rules, also Article 20.6 ICC Rules), which in the current economic climate has found buy-in from a large number of corporates.
A reasoned award is a legal requirement in many jurisdictions, besides being reflective of modern arbitration practice. A reasoned award also enhances the chances that the parties will voluntarily abide by the arbitrators decision. Most arbitral institutions, including LCIA India (Article 26.1.), have a requirement in their rules that the tribunal’s award will have to be reasoned unless parties have agreed otherwise.
However, the rules of arbitral institutions do not lay down the level of detail required in a reasoned award and it is trite that there is no standard universally accepted threshold for the level of detail required in a reasoned award as therequirement of reasons differ from jurisdiction to jurisdiction. In the event, the award does not meet the threshold of the level of detail expected by the parties, the dissatisfied party will challenge an award, either by making an application for setting aside the award or by resisting the enforcement of the award ( N Dewan, ‘The Threshold of Reason’, 2009 (3) Singapore Arbitrator, p 2)
Be that as it may, when an institution administers a case, during the process of scrutiny of an award, it has the opportunity to alert the tribunal regarding the lack of reasoning. The rules of many institutions provides for scrutiny of awards. However under the LCIA India rules, although there is no formal scrutiny of awards, very often the Registrar is asked by tribunals to undertake an informal review of awards to ensure that the relevant dates, procedural history and other relevant details are accurately mentioned in the award.
Further, it is a well know fact that awards bearing the imprimatur of an arbitral institution are less susceptible to challenges vis-a-vis ad-hoc awards, with the courts generally being assured that some sort of quality control has been exercised by the institution in the appointment of the arbitrators and in the oversight of the process.
Cost awards can be used as a procedure to policing or sanctioning orderly conduct by parties in arbitrations. The rules of most arbitral institutions contain specific provisions relating to the award of costs in arbitrations. The LCIA India rules provide that costs should reflect not only the parties’ relative success and failure in the award or arbitration, but also the conduct and cooperation of the parties during the arbitration and any undue delays, unreasonable conduct or unnecessary expense caused by or attributable to a party or its representatives( Article 28.4, LCIA India Rules). Unreasonable conduct by a party could include excessive document requests, excessive legal argument, exaggerated claims, excessive cross examination, dilatory tactics, failure to comply with procedural orders and unjustified interim application( ICC Commission on Arbitration, ‘Techniquesfor Controlling Time and Costs in Arbitration’, ICC Publication No.843, 2009)
With a view to saving time and money, most institutions recommend that parties and tribunals use email for routine correspondence and video conferencing and teleconferencing facilities as a substitute for physical hearings, where appropriate. Institutions also assist parties and the tribunal in arranging for such facilities and other logistical requirements such as real-time transcription of hearings, translation and hearing rooms. Some institutions also offer the use of an online service enabling the arbitration correspondence and documents to be stored and exchanged in a secure online environment ( ICC’sNetCase system and AAA’s Web File online filing and case management system)
Jean-Claude Najar had written in Arbitration International in 2009 that “by whatever means necessary, arbitration needs to be repaired, to be returned to its simple foundations – speed, cost efficiency, and user friendliness. These words ring so very true in the Indian context.
By choosing institutional rules to governtheir arbitration, parties effectively choose the “rules of the game”, and through this choice they are in position to influence the time and costs of the proceedings. Although, institutional arbitration provides an environment which ensures reduction in costs and time of arbitrations, it must be noted that the process will reach its full potential only when the arbitrators, the parties and their lawyers work in cooperation with each other.
And finally, it would be instructive to note that under the Chinese arbitration regime, only institutional arbitration is recognised. The reasoning underlying this position is that arbitration is a new legal system transplanted into China without much public recognition and the legislature were concerned that permitting ad-hoc arbitration at the initial stage/s could diminish the quality of arbitration service and undermine public trust in arbitration. Given the Indian conditions and the general acceptance of the virtues of administered arbitration over ad-hoc arbitration in providing a credible, efficient and cost effective means for resolving disputes, perhaps, it might be worthwhile that we in India explore the possibility of adopting the Chinese model.
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