A simple guide to arbitration for non-contentious lawyers
It is non-contentious lawyers who help clients to choose the form of proceedings that will govern their disputes, and this article provides some essential information for them
The important choice
It’s late at night. No one has given much thought to the dispute resolution clause. You pick a style that seems to have worked before. Surely that’s all you need to do? The answer, of course, is that it’s not. Whether or not your client has considered the possibility of a dispute at that stage (unlikely, perhaps), the choice of dispute resolution procedure (“DRP”) will have a fundamental strategic and financial impact on your client if a dispute subsequently crystallises.
When a dispute arises, the claimant is generally determined to pursue its claim, whilst the respondent to the claim is often more interested in doing all it can to delay and disrupt the claimant. So, whilst an efficient and objective solution to dispute resolution can be readily agreed at contract formation stage (“during peacetime”), once war breaks out, parties will be focused on their own strategic objectives.
A key choice is whether to displace litigation with arbitration. I don’t propose that your client should always choose arbitration. However it is important that you understand that “old” arbitration has been replaced with a new regime, following the enactment of the Arbitration (Scotland) Act 2010. That means that clients should have the chance to understand the real choice that they have between court and other forms of dispute resolution. Anna Poole QC concluded in her article in last month’s Journal that ADR retains an important role in the resolution of disputes, and it is important that the benefits of each form of proceedings are carefully considered when selecting the optimum mechanism for dispute resolution at contract formation stage.
The “big five”
Whilst there are many other hybrids and dispute escalation options, the following might be considered as the “big five” forms of DRP in Scotland.
Mediation is a consensual form of DRP. It can curtail years of risk, uncertainty and costs in lengthy proceedings. However, it cannot finally resolve a dispute without both parties’ consent. So even if parties try to mediate, they still need a means for final resolution if they can’t agree.
Adjudication is implied by statute into construction contracts and is sometimes chosen as a form of contractual DRP in other contracts. It is usually a 28 to 42 day procedure for the very swift, interim resolution of disputes. The loser has to pay up, but the dispute can be re-run in court or arbitration (depending on what you have chosen). So even if adjudication applies, it is still important to contractually select the form of DRP to be adopted for final dispute resolution.
The three primary choices for final dispute resolution are litigation, arbitration or expert determination.
Expert determination provides for final determination by an expert generally on the material provided by the parties, rather than through an adversarial process such as arbitration. It is best suited to purely technical issues, with no legal dispute (e.g. a valuation).
For most contracts, this leaves you with a choice between the formality of litigation (the default) and arbitration (which must be elected for, using an appropriate arbitration clause).
|The “big five” are also the five must-see animals on any African safari. So which animal best suits which form of DRP? Litigation is like the elephant: ancient and venerable, and with unparalleled wisdom. “New” arbitration is the lion: streamlined to its objective and ready for swift finality. Expert determination is the buffalo: solitary and perhaps unpredictable, but focused on the job in hand. Adjudication is the rhino: extravagantly bold, and some might say a little reckless (and it’s all over very quickly). Mediation is the leopard: sensuous and soft, but against the constant threat of a grisly fate.
How do you decide which will best suit your client?
Deciding whether to opt for court or arbitration (or any other form of DRP) requires careful consideration in every case. May I suggest that you consider the following eight factors to facilitate a considered decision?
When asked objectively, most clients want early closure in the event of a dispute. A well run “new” arbitration should achieve swift finality because it can avoid protracted procedure, court delays, and the possibility of multiple appeal. An arbitration may be more susceptible to a jurisdictional challenge, which may cause its own delays and risks. But if you choose to minimise the court’s ability to interfere (see further below), the lengthy delays which were a feature of “old” arbitration can be mitigated against. A well designed arbitration clause has potential to provide a DRP more likely to achieve swifter closure.
Disputes which are contractual or legal at their heart may be best dealt with by an experienced legally qualified person, such as a judge, who is also used to assessing technical expert evidence. However, disputes which are essentially technical in nature (e.g. valuation, delay, and quantum issues) may be resolved more efficiently by a person of appropriate technical skill. A well designed arbitration clause can provide for appointment of a person of appropriate skill from panels of different disciplines, so that the parties have a choice at the time a dispute arises, to select the decision maker best qualified to determine the particular subject matter.
An experienced arbitrator, freed from the well known delays of “old” arbitration, should be able to manage the resolution of a dispute to its most efficient (and swift) resolution.
Parties to an arbitration must also pay for the arbitrator(s). But it is a misconception that judges are free. If arbitration is run efficiently, it should provide a faster, more efficient process, without the risk of lengthy further appeal. The greater overall cost is usually in party costs, including legal and expert. Generally the loser will have to pay, though the winner will usually also end up with net unrecovered costs. A well run arbitration can significantly reduce the exposure to party costs. Selection of the most cost effective process can have a major financial impact on your client’s future.
For many contentious practitioners, court pleadings provide formality of process that narrows the issues and provides for fair disclosure of position. But arbitration allows the flexibility for presentation of a case in a more user-friendly manner, free from the code of court process, and which clients can feel more in control of. Parties can also influence the procedure to suit themselves.
One of the key features of arbitration is that it provides a confidential process, which is bolstered by the new confidentiality rule. Keeping disputes out of the public domain can be of significant importance to clients.
Arbitration can prove tricky in the resolution of multi-party disputes. That said, arbitration does not preclude a claim being pursued separately, and there are options for conjoining disputes in arbitration.
With 148 states signed up to the New York Convention, there can be advantages in the enforcement of arbitral awards in other jurisdictions. Knowing the likely jurisdiction of enforcement can be an important factor in deciding whether disputes are best resolved in the courts or through arbitration.
I suggest that your client should be provided with the chance to review these factors so that it is best placed to make the best commercial decision on adoption of an optimal DRP.
How do you frame your dispute resolution clause?
Of course, provision for arbitration, or any other form of ADR, requires a contractual election. Whilst inserting an “old style” arbitration clause may have seemed sufficient in the past, it is now vital to draft an arbitration clause which is fit for purpose.
It is important to decide who will comprise the pool of specialist arbitrators, and how they will be appointed if a dispute crystallises. Ideally the pool should provide a choice between lawyers and persons of appropriate technical skill, to match the full spectrum of disputes likely to arise. You may provide your own mechanism for appointment of an arbitrator, perhaps from one or more of the arbitral appointments referee bodies. You should check who makes up the panels of those bodies.
You also need to consider appropriate procedural rules, including for the appointment process. You will be assisted here by the statutory provision for the Scottish Arbitration Rules (sched 1 to the 2010 Act), which apply to all arbitrations, though you may consider adoption of a parallel body of rules which tailor the process more particularly to your client’s needs. For instance in November 2012, the Scottish Branch of the Chartered Institute of Arbitrators published the Scottish Short Form Arbitration Rules, which provide for fast track (77 day) resolution of disputes, aimed at disputes under £25,000, but which may be suitable for higher value disputes too. A key advantage is that fast track arbitration may enhance the efficiency of resolution. You will find more details of these rules on the CIArb website (www.ciarb.org/scotland).
The 2010 Act applies the Scottish Arbitration Rules to all arbitrations seated in Scotland. Those 84 rules are either mandatory rules (which cannot be contracted out of) or default rules (which parties can choose to disapply). That means that it is important to provide an optimum procedural mechanism that suits your client, by considering whether to disapply default rules, and to advise your client on any key commercial issues that may arise from that choice. Whilst you should review all the default rules, I suggest that some key choices are as follows.
- In my view the key decision to consider is whether to minimise the court’s power to intervene in the process. If your client is interested in the swiftest finality, then you should consider disapplying all or some of rules 22, 41, 43 and 69. The risk is to restrict the challengeability of an act by the tribunal which your client might be dissatisfied with. But there remain mandatory court powers, so that post-award challenges on jurisdictional grounds (rule 67) or serious irregularity (rule 68) cannot be contracted out of. So this choice is more about restricting the court’s powers, than removing any right to challenge where a tribunal steps outwith its jurisdictional limits.
- I also suggest that you check whether rule 26 (confidentiality) needs any tweaks. Whilst confidentiality is a key feature of arbitration, you should check that the statutory rules do not constrain disclosure that might be important to your client. For instance, whilst there is an exception for disclosure for purposes of public function, councils may wish to check that the rule does not nevertheless constrain them from reports on disputes within the council’s own internal processes that may not be otherwise permitted by the rule.
- I also suggest that you check that the rules on arbitration expenses (rules 59-66) are appropriate, and notice provisions/calculations of periods of time (rules 83 and 84), do not conflict with the wider provisions of your contract.
A (dispute) resolution for 2013
Have you given up on your new year’s resolution? Can I suggest that you set yourself a new, longer term resolution?
Speak to your contentious colleagues to bolster your understanding of “new” arbitration. Please provide your clients with direction on the choice between litigation and arbitration (and other forms of DRP). Having done so, and where your client opts for arbitration, please avoid selecting a style arbitration clause at the eleventh hour and presenting it to your client as a fait accompli. Effective arbitration also needs careful thought regarding the mechanics of its operation at its inception.
Richard Farndale is a director at Burness Paull & Williamsons and Honorary Secretary of the Scottish Branch of the Chartered Institute of Arbitrators. The Chartered Institute of Arbitrators promotes all forms of alternative dispute resolution, not just arbitration.