What plays the key role in the success of an arbitration institution?

February 2013 | PROFESSIONAL INSIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

In the past two decades, resolving cross-border business disputes through arbitration has become standard practice. Several dozen arbitration institutions provide dispute resolution services worldwide. Yet a rather small number of those feature in the category of truly successful and trusted institutions – ICC, LCIA, ICSID and SCC, to name the leaders. This article aims to highlight the key factors in determining the success of a commercial arbitration facility, where the term ‘success’ is to be understood as equivalent to ‘popularity’.

The most obvious reason to prefer a particular institution over another appears to be the applicability of procedural rules that come with selecting the institution. It is noteworthy that numerous arbitral institutions have recently changed or updated their rules. So what do parties to arbitration proceedings tend to appreciate about procedural rules? In our view, an appropriate combination of clarity, flexibility and efficiency might be the answer.

In light of the fact that a decision regarding the choice of a dispute resolution forum quite often rests with in-house counsel not actively involved in the arbitration practice, and thus not closely familiar with the practical idiosyncrasies of various procedural rules, the decision will often depend on the comprehensibility of the text. In that respect, arbitration rules drafted in a clear and precise manner may have a significant advantage over more lengthy documents that contain complex legal and grammatical structures.

As arbitration is frequently described as ‘privatised justice’, the adaptability of the rules to parties’ specific needs and expectations is another important aspect. For example, the CIETAC rules were amended in 2012 to allow parties to locate a seat outside of mainland China. In addition, the 2012 version of these rules abrogated the old default rule on the conduct of arbitration proceedings in Chinese. Nowadays in the absence of the parties’ choice of language, the CIETAC may designate any other language, taking into account several factors, including the subject matter of the dispute and the parties’ nationalities. Therefore, flexibility of arbitration proceedings, stipulated in arbitration rules, constitutes a significant prerequisite for an institution’s success.

The efficiency of the dispute resolution process is the third pillar of the rules’ perceived quality. In the broad sense of the word, ‘efficiency’ equates to a time-efficient and cost-effective dispute settlement that takes into account the parties’ interests and expectations. In terms of efficiency, arbitration rules differ on many grounds, namely the scope of the tribunal’s authority, the availability of pre-arbitration interim relief, and the possibility of consolidating several proceedings. For instance, where urgent interim or conservatory measures are needed before a tribunal is constituted, a party to the ICC proceedings may apply under the emergency arbitrator rules. LCIA rules provide a similar option. In contrast, the ICAC rules do not enable an interested party to seek interim relief prior to the formation of a panel. Therefore, persons involved in some highly time-sensitive areas of business activity are not likely to opt for an ICAC arbitration given other alternatives.

In essence, procedural rules are a key element in determining the success of an arbitration institution. However, some other aspects are also factored into the institution selection process. As is the case with any other provider of legal services, the ability to draw on the expertise of its members forms another cornerstone of success. Since international arbitration institutions do not adjudicate disputes themselves but rather administer proceedings, a decent pool of potential arbitrators is not just a plus – it is a must. With regard to the qualifications of members of an institution, one could say that there ought to be a balanced combination of experts in civil law jurisdictions and lawyers trained in common law. The high academic standing of arbitrators-to-be is usually regarded as an advantage. It should be also borne in mind that certain disputes, such as construction controversies, require particular non-legal expertise. Therefore, a roster of members should not be limited to lawyers, but feature some high-profile non-legal professionals.

As to the sought-after star-arbitrators, having a few big names among an institution’s members is, in itself, a powerful marketing tool. Whereas an interested party may not be willing to nominate a particular seasoned veteran of arbitration, the prospect of selecting his or her ‘colleagues’, even if not equally experienced, but more readily available, may cement the party’s preference for an arbitration facility.

It should also be added that, as a matter of principle, a members’ list has to be nationally diverse so as to enable selection or appointment of a sole arbitrator or a presiding arbitrator who does not share the same nationality with either party to a dispute, if the parties come from different countries.

The arbitrator pools of the world’s foremost arbitration institutions are truly impressive. Those of regional arbitration facilities are less so, as regional players primarily rely on national talent rather than internationally renowned specialists. It is noteworthy that high ranking institutions generally do not have a problem with attracting outstanding arbitrators who further strengthen the institution’s standing among its peers. On the contrary, some smaller facilities may find themselves in a vicious circle as they experience trouble with recruiting top arbitrators and, as a consequence, fail to upgrade their position on the international arbitration market.

However, ‘second-tier’ institutions have a strong competitive tool, that is, lower costs of dispute settlement services. Naturally, to maintain competitive ability, they have to adopt a more loyal pricing policy. For example, adjudication of a €1m dispute under the SCC Rules incurs fees of €85,560 plus VAT. In contrast, arbitration of a $1m valued controversy by an international tribunal constituted under the auspices of the International Court of Arbitration at the Ukrainian Chamber of Commerce costs ‘merely’ $20,200. The difference is obviously substantial. Therefore, parties seeking a neutral dispute resolution forum for medium-sized disputes have a strong economic incentive to opt for cheaper arbitration services, whereas parties to large scale controversies are less likely to spare on arbitration fees. In fact, this cost driven market division is to be welcomed as both the ‘first-tier’ and ‘second-tier’ institutions benefit – the former focus on the most complex (and expensive) proceedings, and the latter capitalise on the steady flow of mid-sized disputes.

To summarise, to be successful, it is important for an arbitration institution to adopt the right pricing policy based on several factors such as current market standing, reputation, clientele and a record of handled disputes. As can be seen, in respect of the economic strategy of arbitration institutions, basic economic rules on the correlation between price and demand hold very true, especially for smaller actors.

While the economic aspect of the functioning of an arbitration institution is fully controllable, the geographical location thereof may not be easily altered. The procedural rules of most institutions allow the parties to agree on a seat outside the country where the institution is headquartered. It is therefore quite normal practice that a LCIA arbitration has its seat in Paris (and, thus, is subject to the liberal French lex arbitri), whereas hearings are held in Hong Kong and Washington, D.C. Despite this geographical flexibility, the proximity of the institution’s headquarters to major economic centres plays a vital role in its success.

Statistical data attests that most cases handled by the Moscow-based International Court of Commercial Arbitration have a close link to the Russian jurisdiction such as the party’s nationality, Russian substantive law applied to the contract, and the like. Therefore, one may conclude that the geographical link to the underlying dispute is indeed a valid reason for selecting a local arbitration institution.

In light of this fact, a question may be posed as to whether an arbitration institution located outside the major hubs of business activity can compete against more favourably located institutions. The Arbitration Institute of the Stockholm Chamber of Commerce and the Permanent Court of Arbitration in The Hague instantly come to mind as positive examples. However, in the case of the Permanent Court of Arbitration, its success may be largely attributed to its outstanding track record and the traditional popularity of The Hague as an international dispute resolution venue – the PCA is one of the oldest institutions of its kind in the world. The popularity of the Stockholm Institution appears to be principally based on the perceived neutrality of the Swedish forum.

In terms of geographical location, therefore, two common factors can be identified in an arbitration institution’s popularity – either proximity to the world’s economic centres, or its location in a politically neutral jurisdiction such as Sweden or Switzerland.

As discussed, the seat of arbitration proceedings does not necessarily correspond to an institution’s place of incorporation. For example, parties are free to hold an ICC arbitration in Istanbul, thus locating the seat in Turkey. In case of ICC proceedings seated in Turkey, French courts will not have jurisdiction to decide a motion to vacate an award. Yet empirical studies reveal the clear correlation between the success of arbitration institutions and the overall quality of the legal system in the country of incorporation. This may be due to the fact the jurisdiction of incorporation tends to affect the image or perception of an institution even when national courts of the state will not be able to review the grounds for setting aside an ensuing award, if the arbitration was seated outside its territory.

Perception of an arbitration body is closely linked to that of the host country. A state willing to enhance the international standing of its national arbitration bodies must seek to improve its judicial system, upgrade national legislation on arbitration and other laws, and combat corruption so as to create a pro-arbitration image. In fact, there is not a single story of global success of arbitration institutions based in states with flawed legal systems. Therefore, the competitive ability of an arbitration facility is a product of the concerted efforts of the institution and the state.

To summarise, the success of an arbitration institution is dependent on a handful of factors that range from its pricing strategy to the overall quality of the legal system of the host state. From the philosophical perspective, success factors may be said to extend beyond those enumerated in this article to such categories as the historical traditions of dispute resolution and cultural predispositions to litigate disputes or settle amicably. However, for the purposes of creating a practical checklist of measures that can be implemented in practice, it suffices to mention the following prerequisites for popularity and commercial viability: elaborate arbitration rules, a broad arbitrators’ roster, considered pricing, marketing policies, and the functioning legal system of the country of incorporation.

Elvira R. Gadelshina is an associate at Khrenov & Partners. She can be contacted on +7 (495) 927 0707 or by email: e.gadelshina@yklaw.ru.

Elvira R. Gadelshina

Khrenov & Partners