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What are the benefits and pitfalls of arbitration?

by Matthew Rushton on 20 Sep 2016

the benefits and pitafalls of arbitration

When properly managed arbitration offers certainty, finality, a quicker, cheaper result than going to court and an award enforceable worldwide. Arbitration is, therefore, the default choice for cross-border contracts, providing for institutional or ad hoc proceedings before either a sole arbitrator or a panel of three. The composition of the tribunal is critical to achieving an acceptable result, and the opportunity to select arbitrators according to their sector expertise and/or disposition relative to your side’s arguments can offer major advantages.

Under a tri-partite neutral arbitration system, the convention is that each side appoints a single arbitrator and those arbitrators then appoint a chairman. Each arbitrator must meet the necessary standards of independence and impartiality. Selecting an arbitrator, therefore, is a question of finding someone maximally disposed to your side’s arguments with the minimum appearance of bias. So-called party-appointed arbitrators are not there to advocate for your side’s arguments, but can ensure that those arguments are considered by the tribunal.

Arbitration is inherently business friendly: selection of tribunal members permits a degree of sector specialism
unavailable through the court system; the consensual nature of proceedings makes for a less formal, more
flexible procedure, and hearings and the resultant awards are private and confidential. Nevertheless, issues of cost and time pervade the field, and users should be aware of potential pitfalls. Most stem from so-called “due process paranoia”.

According to a recent survey, due process paranoia describes a reluctance by tribunals to “act decisively in certain situations for fear of the arbitral award being challenged on the basis of a party not having had the
chance to present its case fully. Many interviewees described situations where deadlines were repeatedly
extended, fresh evidence was admitted late in the process, or other disruptive behaviour by counsel was
condoned due to what was perceived to be a concern by the tribunal that the award would otherwise be
vulnerable to challenge. Notably, even arbitrators identified this phenomenon as both problematic and

The effect is to unnecessarily elongate the process, adding to cost and delaying the final award. It is a
question of striking an appropriate balance, and there are no easy solutions. Nevertheless, section 33(b) of
the English Arbitration Act 1996 defines the general duty of the tribunal as follows: “(To) adopt procedures
suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined.”

Much therefore depends on the arbitrator(s) selected and their interpretation of their duties. This reveals a
paradox: parties should be careful to seek reassurances that arbitrators are not overtrading and have time to make appropriate procedural orders, and time to produce the award within an acceptable timescale after formal close of proceedings. At the same time, those arbitrators most familiar with the process will likely be those most confident in taking a robust view of their duties in respect of avoiding unnecessary delays. Finding experienced arbitrators with sufficient time is a conundrum all parties face.

Institutional versus ad hoc arbitration

In recent years, there has been a trend towards greater use of institutional arbitration and away from unadministered and ad hoc proceedings. Institutional arbitration offers numerous advantages in respect
of controlling the process to the advantage of the parties. These include offering pre-established rules and procedures, which ensure that the arbitration proceedings begin in a timely manner; they offer administrative assistance, often from a secretariat or court, and a list of vetted, experienced, and qualified arbitrators to choose from; assistance in encouraging reluctant parties to proceed with arbitration; and an established format with a proven record. Institutions are also on hand to provide assistance and advice to the parties. Without such a facility parties would be dependent on the court of the seat of arbitration – at further cost and expense - for assistance with taking the arbitration forward.

In selecting an arbitration institution, there are numerous factors to consider, including administrative fees (which vary from institution to institution), whether bureaucratic oversight may help or hinder progress, and whether the institution’s rules provide for realistic time frames for parties to respond.

The advantages of ad hoc arbitration are principally concerned with cost, and the process is therefore typically thought more suited to smaller claims. It offers greater flexibility than institutional arbitration, enabling parties to agree on the procedure themselves. The downside, of course, is that cooperation between opponents is not always forthcoming in the context of a dispute. Likewise, where language and cultural differences are a factor, misunderstandings on procedural points can add to delays and ultimately cost.

It is worth considering figures from the International Chamber of Commerce Court of Arbitration in relation to institutional costs. The overall costs of an international arbitration, on average, were in the following proportions: tribunal 16 per cent; administration 2 per cent; counsel 82 per cent.

Some question the use of ad hoc arbitration on cost-saving grounds. The website out-law.com (provided by law firm Pinsent Masons) concludes as follows: 

In reality, an ad hoc arbitration may not prove to be less expensive than the institutional process. Firstly, the
parties are required to make arrangements to conduct the arbitration, but they may lack the necessary
knowledge and expertise. Arbitrations are generally conducted by people who are not lawyers - however, this may result in misinformed decisions especially in international commercial arbitration.

Secondly, where there is a lack of cooperation between the parties or delay on the part of the tribunal conducting the arbitration or writing the award, a party may need to seek court intervention. Litigation costs would not only negate the cost advantages of ad hoc arbitration, but also the parties‘ intention to avoid the courts through alternative dispute resolution methods.

Thirdly, in complex cases, the tribunal may seek to appoint a secretary to deal with the considerable administrative work involved. The additional costs of the secretary‘s fees will add to the cost burden of the arbitration.

Although ad hoc arbitration is more flexible and often best suited to the parties‘ individual needs, it will only
be cost effective where:

• There is the required cooperation between the parties;
• The parties understand arbitration procedures;
• The arbitration itself is conducted by experienced arbitrators.

To read more about arbitration as a cost-effective alternative to litigation, read our eBook on the subject, Litigation in Review.

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Topics: International Arbitration, Mediation, Litigation

Matthew Rushton

Written by Matthew Rushton