November 16, 2009
By Duncan MacKay and Kathleen Bryan
-- Nonadministered process can eliminate expensive services and give parties more control. --
Commercial arbitration in the United States is under attack. Clients and their counsel are turning away from arbitration and complaining that arbitration’s cost and complexity now approach or equal those of litigation, without the benefit and safeguards of appeal rights.
Thomas J. Stipanowich, “Arbitration: The ‘New Litigation,’ ” 2010 U. Ill. L. Rev. 1 (forthcoming
Jan. 2010). For example, construction industry arbitration use will soon be in decline, thanks to a move by the American Institute of Architects. The AIA recently changed its construction contracts, abandoning a requirement that all disputes be decided by binding arbitration. The requirement has been in AIA contracts since 1888. Instead, following mandatory mediation, the AIA defaults to litigation of disputes unless the parties affirmatively elect arbitration.
Business arbitration originally promised parties more autonomy—the ability to design a procedure to adjudicate their disputes more efficiently by decision-makers who understood their business needs. Now, to achieve arbitration’s original promise, parties may choose to increase their control over the arbitral process by using ad hoc arbitration. The traditional and generally accepted arbitration model uses well-known arbitral institutions to facilitate arbitrator selection
and process management, from initial demand to final award. The International Chamber of Commerce, the American Arbitration Association, the London Court of International Arbitration, the Stockholm Chambers of Commerce and the International Centre for Settlement of Investment Disputes are the most well-known arbitral institutions with procedural rules providing for constitution of the tribunal, supervision of the procedures and determination of arbitrators’ fees. Bargaining for a different process can be more difficult and viewed with suspicion by adversaries if they have no experience with it. Nevertheless, today’s economic climate encourages a less expensive, more efficient and more flexible alternative: ad hoc or “nonadministered” arbitration, which puts the arbitrator or arbitral tribunal in charge of the process and, at the same time, increases party involvement and direction.
Nonadministered processes were designed to eliminate unnecessary and costly administrative
services and to give parties more control over the process. Parties may design the procedures themselves or use a set of pre-existing rules, such as the International Institute for Conflict Prevention and Resolution Rules (CPR rules), www.cpradr.org, last updated in 2007, or the UNCITRAL Arbitration Rules, promulgated in 1976 by the United Nations Commission on International Trade Law (UNCITRAL rules) www.uncitral.org. Both sets of rules provide processes to facilitate the parties’ tribunal selection and challenges, and then leave the remainder of the process to be developed by the parties and arbitrator(s).
The cost benefits of ad hoc arbitration are obvious, since there are no institutional expenses. The “administration” costs are part of the neutrals’ time/matter charges. Fees in traditional administered processes can range into the six figures—or more—to cover the cost of pleadings exchanges, invoicing, scheduling, etc. Some cases may need heavy case administration. But many experienced in-house counsel handling business-to-business disputes
prefer working directly with the arbitrators.
Although the cost and time savings are significant, they are not the only reasons to choose nonadministered arbitration. Ad hoc arbitration gives the parties maximum flexibility to design a process that works based on the circumstances of each dispute, rather than accepting a “one size fits all” institutional model.
Several companies are using ad hoc arbitration as their preferred dispute-resolution platform, with executive negotiation and mandatory mediation as preludes to arbitration— a true multistep ADR process. The approach is designed to promote efficiency, timeliness and flexibility in dealing with business disputes. There are seldom “cookie-cutter” business disputes that lend themselves to a cookie-cutter administered process.
Although most business disputes are resolved by the negotiating parties at or before the mediation step, having an arbitration process that can be designed in collaboration between the parties and with the arbitrator(s) ensures that the process will meet the parties’ specific needs in a particular dispute. It also encourages the disputing parties to collaborate, cooperate and continue their business relationship.
CONTROL, FLEXIBILITY, EFFICIENCY
Party autonomy is a fundamental precept of international arbitration. From that principle
follows the right to design a process that meet parties’ needs. Article 19(1) of the 1985 UNCITRAL Model Law provides: “Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.” Arbitral institutions necessarily give themselves some authority over cases and restrict parties’ rights. This trade-off exchanges some level of party autonomy for administrative efficiency and oversight. For example, most institutions have standard processes that the parties must accept without modification when using the rules of that institution. When parties agree to International Chamber of Commerce arbitration, the rules provide that the parties and the arbitrators draw up terms of reference.
These must be approved by the ICC Court of Arbitration, adding time and cost to the proceeding. The average ICC case takes approximately two years to be resolved, as opposed to less than one year for an ad hoc arbitration.
Arbitral institutions can sometimes lose sight of the fact that their processes are there to facilitate the efficient and effective adjudication of parties’ disputes, and their administration
processes actually become a barrier and not a bridge to conflict resolution. In a recent arbitral institution’s administered process of a matter, the disputing parties were prevented from adjusting the course of their dispute because the proposed modification did not fit neatly within the administrator’s prescribed process. The administrator insisted on applying its rules rigidly—a form-over-substance approach to managing the dispute. This led to an eventual withdrawal of the dispute from the provider and a party-led resolution. Arbitrator selection is another area of institutional control. Some institutions’ rules require parties to choose from their list, giving parties limited ability to use a different selection process or interview arbitrators. In ad hoc arbitration, parties have complete control over the selection process and can select arbitrators in any way they choose.
In addition to better selection control, a self-designed process can define the precise level of discovery needed for a case. It allows the use of mediation and hybrid processes, the bifurcation of issues, the inclusion of early neutral determinations and other procedures
that vary from traditional administered practices.
In a recent nonadministered arbitration of a multimillion-dollar dispute, Northeast Utilities and its counterparty agreed to a streamlined arbitration process that included prefiled written testimony and exhibits, stipulation of undisputed material facts and an opportunity for “live” cross-examination of witnesses on any genuine issues of material fact. The party-appointed panel managing the process embraced the approach, encouraged the parties’ active collaboration and cooperation on scheduling and information exchange, and ultimately concluded the hearing in a single day, within nine months after the panel chair had been appointed. The parties reached a negotiated resolution before the panel issued an award. This approach would not have been feasible under an administered model.
Some institutions require a hefty fee deposit before an arbitration can begin. In ad hoc proceedings, the parties can work with the arbitrators to design realistic fee payments. This factor is critical in less-developed countries, where fronting half of the fees at the outset of an arbitration simply is not a viable option. The adjudication of disputes can be a costly proposition in the best of circumstances, so eliminating fee and deposit cost barriers may create additional dispute resolution opportunities.
Direct communication with arbitrators without an institution acting as an intermediary can streamline the entire process. Institutional bureaucracy can be inefficient and can add steps and complexity. Delays can be created by institutions processing pleading exchanges and scheduling conferences and other meetings in a less-than-timely fashion. Little value is added by the intermediary role. In today’s electronic world, old-world institutional pleading management is no longer needed and simply adds time and cost to the process.
Parties also can be frustrated by arbitrators who fail to abide by predetermined time limits. In institutional arbitration, the institution may have the power to enforce these time limits—but in practice steps in only after truly egregious delays. Thus, direct communication with the arbitrators remains the better method for pushing the process to a more efficient conclusion.
Common wisdom about arbitration is that the quality of the arbitration is completely dependent upon the quality of the arbitrator. Nonadministered processes recognize that truth and put their faith in the arbitrator to manage the process effectively.
Knowing that an arbitrator has subject-matter expertise, standing in the profession and formal arbitration training and experience in the nonadministered setting is a comfort not only to in-house counsel but also to the business representatives involved in a particular dispute when moving to the arbitration step.
Parties want active arbitrators who move cases along quickly. In ad hoc arbitration, parties
design the entire process collaboratively and in cooperation with the arbitrators. They can more easily include case-management tools, time limits and mutually agreed-upon schedules and processes that work for all the participants and enable them to adjudicate or resolve their dispute on their terms.
Arbitration institutions clearly provide needed services. But such services aren’t needed in every case. In traditional administered arbitration, the parties lose some of their power and nearly all of their control over the process.
When considering the best arbitration process to meet business needs for efficiency and cost savings, parties should adopt the ad hoc process in appropriate cases. Even when the parties originally contracted for institutional arbitration, they can adopt ad hoc procedures at the time of the dispute. Cost savings, control and efficiency, as well as greater overall satisfaction with the process, all can be achieved using ad hoc arbitration. It’s about time!
Duncan MacKay is deputy general counsel at Northeast Utilities, which has adopted ad hoc arbitration as its preferred dispute resolution platform. Kathleen Bryan is president and chief executive officer of the International Institute for Conflict Prevention and Resolution (CPR Institute).
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