Despite the increasing popularity of arbitration, a significant number of clients have been disappointed by the performance of an arbitrator. LB asks what can be done to improve faith in the system
When something gets a mention in the Chancellor of the Exchequer’s Budget speech, it is usually important. So when George Osborne spoke of the government’s intention to ‘promote the UK as the global centre of legal arbitration’ in March, the global arbitration community sat up and took note.
While other international centres such as Singapore and Dubai have made significant investments in recent years in a bid to gain traction on the global stage, London has enjoyed a long-held tradition for having an arbitration-friendly judicial system along with Paris, New York and Geneva. However, when the government of one of those established players realises that something must be done to ensure the jurisdiction’s continued dominance, it shows how important this reputation has become.
Recent data would bear this out. US firm Fulbright & Jaworski has produced an annual survey of UK and US trends in dispute resolution for the past seven years. Its most recent report, published in November 2010, found that the number of respondents party to an international arbitration in the previous 12 months had doubled, up from 22% in the 2009 report. The increase was largely due to a spike in the number of UK companies involved in arbitration – 52%. Of these respondents from the financial services and manufacturing sectors, 40% reported being involved in one or more international arbitrations. The picture, in other words, was of an arbitration world in rude health. Yet there are question marks hanging over the system itself.
No satisfaction
The School of International Arbitration (SIA), based at Queen Mary, University of London, recently claimed to have carried out ‘one of the largest independent empirical studies ever conducted on corporate attitudes and practices regarding international arbitration’. Its report, 2010 International Arbitration Survey: Choices in International Arbitration was sponsored by White & Case. The study looks at the key factors that drive corporate choices about arbitration. In the section that deals with the appointment of an arbitrator, one significant statistic emerged: 50% of respondents said that they had been disappointed with the performance of an arbitrator.
A logical response to this data is to counter that in any arbitration one party will lose the case, ergo one half of all those involved will find themselves unhappy with the result. Indeed, many of the arbitration specialists interviewed for this feature pointed out that this was a glaring conclusion. ‘The next obvious question is how many of those 50% that were disappointed actually lost their case,’ says John Whittaker, arbitration partner at Clyde & Co. ‘It’s a difficult statistic to make anything of, quite frankly.’
The survey went on to ask respondents to provide the top three reasons behind their disappointment and, although the answer ‘bad decision/outcome’ was the most common cause of dissatisfaction, this was the top answer for only 20% of those surveyed. But Domitille Baizeau, a partner in the arbitration team at Lalive in Geneva, says that while the survey and the SIA are respected, the 136 respondents that participated in the survey may, for instance, not necessarily be a complete reflection of the 1,500 or so parties involved in International Chamber of Commerce (ICC) arbitration alone in the same year. ‘If you look at the reasons given for parties’ disappointment, these are classic responses from losing parties in an arbitration,’ she says. ‘One has to be very careful using this survey as a basis for an assertion as to what the users think about arbitration.’
‘A client with a problem that requires arbitration needs our input as to who the arbitrators should be.’
John Whittaker, Clyde & Co
However, other popular reasons for user dissatisfaction were that the arbitrator was ‘overly flexible/failed to control the process’, ‘caused delays’ or demonstrated ‘tardiness in rendering an award’. If winning parties are complaining about the length of time it takes an arbitrator to render an award (a common complaint, if you speak to arbitration lawyers) then it is clear that not all criticism of arbitrators is fuelled by sour grapes.
‘There remains a good stock of international arbitrators, but the best are usually very busy which often delays the process, or at least the rendering of awards,’ says Gordon Bell, an international arbitration partner at Reed Smith in London, who joined from Pinsent Masons in October 2010. ‘That said, the arbitration process and lawyers and arbitrators who operate in this area are rightly under pressure from clients to operate the process in a cost-effective and time-efficient manner. Unfortunately, many within this community have not yet appreciated these facts and arbitration, as a result, is gaining a reputation which will damage it in the long run,’ he adds.
The problem, some believe, lies in the fact that, while global arbitration has become increasingly popular, the arbitration community has not expanded significantly. Constantine Partasides, London head of Freshfields Bruckhaus Deringer’s 75-strong international arbitration group, notes that ‘the size of the international arbitration Bar is simply not keeping pace with expansion in the arbitration market and the number of cases that are coming through’. Another Reed Smith arbitration partner, Gautam Bhattacharyya, points out that clients have rightly been disappointed by cases where co-ordinating the diaries of three arbitrators has lead to delays and where hearings have not always been tightly managed and can drag on unnecessarily for fear of giving the impression that a party has not had a fair chance to state their case. Awards can also sometimes be thin on reasoning. ‘There can often be unacceptable delays in the delivery of awards – this can take several months when a High Court judge can turn a judgment around much quicker,’ he says. ‘There can sometimes be cases where an arbitral tribunal needlessly splits the issues, rather than being decisive on them in favour of one party.’
Overtrading is another major issue. Because the community is so cosseted and only a handful of arbitrators are recognised as best of breed, everyone wants to appoint them. As such, their popularity sometimes exceeds their capacity to handle cases. ‘There have only been some exceptional cases where I contacted a possible candidate to chair an arbitration and that person was honest enough to tell me that they had a heavy caseload and they couldn’t guarantee a speedy procedure,’ says Erhard Böhm, partner at Baier Böhm in Vienna. ‘I think that’s very good, but it’s the exception.’
Some arbitration specialists believe that overtrading is less of a problem than it was because the pool of available talent has widened. ‘This is arguably less of a valid concern today as it was a couple of years ago because the arbitration community has been, and still is, growing significantly,’ says Harold Frey, partner and head of arbitration at Lenz & Staehelin in Zürich. ‘Undoubtedly, there have been more and more people specialising in arbitration, so it may have become less of a problem because you have far more options to choose from. However, the issue remains that clients often want the best and most experienced specialists for their case, and these are typically those who have a lot on their plate already.’
Adding value
Few will openly criticise the cartel-like nature of the international arbitration community, simply because everyone knows each other. More than one partner at a law firm observed that there was a bit of a ‘mafia’ at play. Many events organised among the international arbitration community involve the same faces and it is very obvious, arbitration specialists report, that there is a sense of community. Members of this community are keen to help each other out, making it very difficult for new blood to break through.
Perhaps the most important part of the job for an arbitration specialist at a law firm is to help their client appoint the most suitable arbitrators for the case. However, there seems to be some uncertainty among clients that they are getting the best. Some are even questioning whether they should develop a greater understanding of the arbitrator community themselves, independent from their law firm advisers, and perhaps have a greater say on who they appoint as arbitrator.
In the SIA/White & Case survey, only 28% of respondents said that they routinely gather information about potential arbitrators whom they may appoint to arbitrate potential disputes, the majority preferring to delegate this responsibility to external counsel. Reflecting this, 68% said they do not feel that they have enough information to make an informed choice about arbitrators independent of input from external counsel. With the input of their legal advisers, 67% feel able to make an informed choice. However, 67% still seems rather low considering the importance of the decision. That 33% still felt they were unable to make an informed choice about arbitrators even with the help of external counsel perhaps says more about the choice of external counsel than anything else. The report notes that this statistic suggests that the system of law firms choosing arbitrators for clients is flawed, with lawyers not making the most of their role as gatekeepers to the arbitration community. It went on to add that there is a real sense that clients would relish the opportunity for more transparency in the appointment process and to have more influence over the appointment of those making the arbitration decisions.
However, many lawyers interviewed suggest that encouraging clients to have more of a say in selecting an arbitrator would defeat the purpose of their role. ‘For me it would be like saying my GP has too much influence over which medical specialist I should go to or which hospital I should go to,’ says Baizeau.
‘In my experience, in many instances outside counsel are not as well informed as they could be.’
Peter Rees QC, Royal Dutch Shell
‘Clients pay lawyers for their advice on who to nominate as arbitrator, and lawyers quite properly suggest those arbitrators that they know, trust and believe to be competent or capable,’ says Paul Turner, regional head of arbitration at Al Tamimi & Company in Dubai. ‘If lawyers feel they have insufficient knowledge to pass on recommendations, they should not be afraid to say so. Equally, clients should press their lawyers for a wider selection if they feel they are not being presented with a good enough range of candidates.’
‘In my experience, a client that comes to us with a problem that requires arbitration does need our input as to who those arbitrators should be,’ says Whittaker. ‘We certainly view that as an important stage in the process. Many of the clients have little or no knowledge of who the arbitrators are, as often they are coming to the arbitration process for the first time.’
However, there is a new school of thought. Chakrapani Misra, partner at Khaitan & Co in Mumbai, argues that clients should educate themselves enough to make the ultimate decision. ‘In our view, it is important that the client should choose the arbitrator independently,’ he says. ‘The assistance of the lawyer may be taken for making choices or seeking suggestions. However the final decision must rest with the client.’ He adds, ‘It is extremely important to ensure that the personal preference of lawyers does not hamper the independence and impartiality of the process of arbitration.’
Peter Rees QC, legal director of Royal Dutch Shell, is in a particularly unique position. He joined Shell at the end of 2010 from Debevoise & Plimpton, where he was a partner in the firm’s European dispute resolution team. A chartered arbitrator, he was also previously head of Norton Rose’s dispute resolution practice. As such, Rees can give an overview of the position from the perspective of an arbitration partner at a large international law firm and now as head of legal at a giant global energy company. He is unlikely to need the input of external legal advisers to tell him which arbitrators to pick, but points out that clients really need to understand the community properly to make the right choices.
‘While there are some, like me, that have a background in commercial arbitration or, because of the size of their corporations, are involved in sufficient arbitrations to take a more informed view on suitable arbitrators, in the main general counsel are hugely reliant on outside counsel in selecting an arbitrator,’ explains Rees. ‘However, in my experience, in many instances outside counsel are not as well informed as they could be, either – simply because they tend to have their favourites who they tend to use or even create relationships with. So there are quite a few instances of arbitrators being appointed by the same counsel on a number of occasions.’
Rees’s former peers recognise the understanding that he has of the issues and find it particularly interesting that a disputes specialist has been chosen to run the legal practice at Shell, given how much international arbitrations involving energy companies has risen in recent years. ‘If you went back five years, the chances of a company like Shell choosing a disputes specialist as general global counsel would be far lower,’ says Partasides.
But while clients could arm themselves with reams of information about an arbitrator’s professional history, true knowledge about their abilities to handle a case is only passed on by word-of-mouth.
‘How do you determine whether a QC in London or a partner in a Zürich law firm or, say a partner at White & Case in New York, has got the skills you want for your case?’ asks Baizeau. ‘Finding basic information is easy but you’re never going to find details about an arbitrator’s soft skills. You find out by talking to colleagues in the community itself, and we talk all the time,’ she explains.
Under the influence
One issue that perplexes clients and re-emerges time and again is the relationship between the arbitrators and the lawyers representing one of the parties. This harks back to the accusation of there being a clear cartel at the heart of the arbitration community. The rules are clear: lawyers from the same law firm cannot act as arbitrator or party counsel in the same arbitration, nor can they represent the same client as an arbitrator and subsequently as party counsel in another arbitration. In Switzerland, for example, some established law firm partners who act exclusively as arbitrators spin off from their law firms and set up on their own, with leading arbitrators Gabrielle Kaufmann-Kohler and Laurent Lévy, both former partners of Schellenberg Wittmer, being specific examples. Jan Paulsson at Freshfields Bruckhaus Deringer is one of the world’s leading arbitrators, but the firm has to review all conflicts very carefully before he or others accept mandates to act as arbitrators. Many partners who have developed reputations as arbitrators will take up a door tenancy at barristers’ chambers to pursue this work.
It is the barrister’s role in arbitration that has become a particular issue and a problem unique to the UK. It is not unheard of for international arbitration proceedings in London and other arbitration centres to feature at least one barrister and one arbitrator from the same set of chambers. Sometimes, the barrister and arbitrator have been appointed by the same party. In other cases, they may be from the same chambers, but appointed by different parties. Either way, pressure is mounting from all sides to end this convention. While barristers in the same set of chambers are ostensibly self-employed and do not share common financial incentives, the feeling among lawyers and clients alike is that it is inevitable that some degree of influence and bias will manifest itself when two individuals occupy the same workplace daily.
An example of this problem emerged in the 2008 case Hrvatska Elektroprivreda v Slovenia. Allen & Overy acted for Slovenia and, a week before the hearing, attempted to introduce a QC from the same chambers as the chairman of the tribunal to the proceedings. The claimant’s lawyers, Hunton & Williams, complained about the eleventh hour disclosure of the QC’s involvement and objected to his role, despite assurances that he had no relationship with the chairman. The tribunal noted that barristers are sole practitioners and that chambers are not law firms; however, it also observed that chambers have evolved and often market themselves collectively. It referred to paragraph 4.5 of the background information on the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration, which refers to ‘an understandable perception that barristers’ chambers should be treated in the same way as law firms’. The QC was ultimately excluded, which was a significant ruling that could allow a challenge each time a barrister and counsel come from the same chambers. However, the tribunal said that there are no hard-and-fast rules and pointed to the specific circumstances of this case, where a very late notification had created an atmosphere of suspicion.
With the parties to the arbitration becoming increasingly international and less familiar with the UK’s unique legal system, many clients are getting first-hand experience of a system that they can even view as unfair. Steptoe & Johnson arbitration partner Tom Sprange says he often finds his clients perplexed at the potential for a close relationship between barristers from the same set acting as arbitrator and counsel in the same arbitration, and cites a recent case of his where the arbitrator had ex parte communications with one of the parties. ‘The important issue here is perception,’ he says. ‘While barristers have acted in this way for years and those of us familiar with the system find it perfectly acceptable, a number of foreign clients who aren’t familiar with the UK system of each barrister in a set of chambers acting independently and self-sufficiently find it very hard to understand. I have one client who is from a former colony and he views the process, somewhat dramatically, as an imperialistic English conspiracy against him.’
‘Every international arbitration retains the potential to be the perfect procedural organism, with the ability to positively evolve.’
Constantine Partasides, Freshfields Bruckhaus Deringer
And while the problem is largely one of perception rather than reality, the effect of this cannot be overlooked. ‘If you’ve got lots at stake and these things often come down to a very fine margin, even the perception, however irrational, of an opponent obtaining a 1% chance of some kind of advantage is not something that many clients are prepared to voluntarily stomach,’ adds Sprange.
It is perhaps unsurprising, then, that arbitration specialists in centres outside London are critical of the dual role of barristers in arbitration proceedings. ‘It’s a huge issue,’ argues Charles Adams, the Geneva-based head of Akin Gump Strauss Hauer & Feld’s international arbitration practice. ‘In 30 years of doing this I have never understood how it can be maintained with a straight face that normal conflict of interest rules do not apply to barristers within the same set of chambers – even though they have breakfast and lunch together every day of the week and are the best of friends.’
However, Freshfields’ Partasides argues that it is increasingly less common for law firms to instruct barristers to argue their cases for them, as many lawyers handle their own advocacy in arbitration hearings. The slightly more pernicious tactic, a favourite of some defence counsel, is to appoint another QC from the same chambers as the chair of the arbitration or a sole arbitrator to play on the other side’s fear of bias or lack of independence. They will be forced to object to the appointment of this arbitrator, slowing the entire process down.
Given these fears, it appears that a consensus has emerged that makes it very unlikely, without the consent of all the parties involved, for a barrister and arbitrator to be from the same chambers. ‘I think those days are gone and, if they haven’t gone, they will be very shortly,’ says Rees. ‘It’s a battle that I think barristers would be better not fighting, because I don’t think they are going to win in the international arena.’
There is a strong feeling that sooner rather than later the main arbitrators based in UK chambers will break away to seek their own premises elsewhere. Many suspect that the only reason these arbitrators have remained at leading arbitration chambers such as Essex Court Chambers and 20 Essex Street is because it has been administratively convenient for them. A shake-up of the established players at the Bar seems likely.
Independent review
Even if it would be nonsensical for clients to choose their own arbitrators independent of external counsel, then they have made it clear that they would be keen to review the performance of arbitrators, to instil a certain level of quality control. In the SIA/White & Case survey, 75% of respondents said that they would welcome the opportunity to review or assess arbitrators at the end of the process. The vast majority of those clients would like to submit their reports and assessments directly to the institution where the tribunal is held. This may give the institutions a better idea of which arbitrators to retain on their lists and enable them to give feedback directly to the arbitrator. A smaller minority would like these assessments to be made publicly available, allowing all concerned to have a better idea of an arbitrator’s commitments, track record and, where possible, the awards given by that arbitrator and how long it took to render that award.
Some solicitors are obviously nervous about this becoming a reality. Even if the lawyers were not involved in the assessment of arbitrators directly, they could find themselves guilty by association. Very rarely will a lawyer’s opinion of an arbitrator differ greatly from that of their client.
Clyde & Co’s Whittaker points out a practical issue with client assessment. ‘Of course, on any given case you assess the suitability of an arbitrator not only before the result is known but before the process begins,’ he says. ‘And the conduct of the proceedings and the award, including how it is expressed, will often determine whether the client is favourably or unfavourably disposed towards an arbitrator.’
Rees suggests another way: ‘I see no problem with lawyers asking arbitrators to give references for lawyers who have appeared in front of them for both parties,’ he says. ‘So if you’re thinking of appointing Mr X or Ms Y, you can call up the lawyers who appeared on the last few cases they’ve been involved in.’
‘You find out about an arbitrator’s soft skills by talking to colleagues in the community itself.’
Domitille Baizeau, Lalive
Perhaps the answer is for the institutions to maintain their own records and deal with arbitrators that are not up to scratch in their own way. Freshfields’ Nigel Rawding observes that the conventional wisdom that arbitration is attractive in part because parties can choose their own arbitrators, and therefore feel they have ‘one of their own’ on the panel, is being questioned, especially given the propensity of some parties to mount tactically motivated challenges on ever more tenuous grounds and the resulting disruption to the process. Party nomination works only if everyone plays by the same set of rules, and there is a school of thought, he argues, that it would be a healthier system if the arbitration institutions selected all the arbitrator(s) for each case – unless, of course, the parties agree on the composition of the panel at the outset. This should have the effect of speeding up the process, especially in the early stages of an arbitration. However, as Rawding points out, ‘for this to be the default position, parties and their advisers would need to have real confidence in the ability of the institutions to deliver’. That cannot always be taken for granted.
Adams at Akin Gump argues that if the lawyers choose the arbitrators, then it’s a case of better the devil you know – you can have a say in which arbitrators to avoid. If the institutions start picking the arbitrators, then that control is lost. He cites the London Court of International Arbitration as an example: ‘The LCIA, like the ICC and other arbitral bodies, has a stable of favourites that turn out time and time again,’ he says. ‘What if I don’t like certain of these people? I would rather have some degree of control over the process.’
Fresh start
Despite the criticisms that have been levelled at arbitrators and the evidence of client dissatisfaction with the process, it is important to note that the problems are not insurmountable. Arbitration remains an incredibly popular form of dispute resolution. As a client, Shell’s Rees sees a dismantling of the old guard and some bright new talent emerging. ‘I think the community has become more diverse,’ he says. ‘I have certainly seen, in the last few years, a group of new arbitrators coming through, so it’s no longer the same old names. However, I suppose after a while the new lot will become the same old names as well. You’re seeing more female arbitrators now, and I know the ICC is trying to promote more young arbitrators where appropriate. The LCIA does a good job on that as well.’
Partasides is evangelical about the merits of arbitration, and argues that where problems occur, the flexibility of the system allows the situation to be rectified swiftly.
‘Every international arbitration is a microcosm of potential procedural reform,’ he argues. ‘Every international arbitration retains the potential to be the perfect procedural organism, with the ability in each and every case to positively evolve; to suppress mutations; to accommodate refinements.’
As with any discussion over perceived weaknesses in a system it is important to see the wood as well as the trees, and this is why any discussion over the performance of arbitrators must take into account the success of the arbitration system overall. Partasides, in a recent speech outlining ways to make arbitration work better, recalled what was said when the London Chamber of Arbitration was set up in 1892: ‘This Chamber is to have all the virtues that the law lacks. It is to be expedient when the law is slow; cheap where the law is costly; simple where the law is technical; a peace-maker instead of a stirrer-up of strife.’
If arbitration is delivering generally on these aims, and that is up for discussion, then perhaps any wrinkles can be ironed out for the greater good. LB