The bottom line, American Investor, Summer 2013

Dispute management is key in arbitration

When arbitration is handled properly, it is not just a method for resolving disputes, but also a tool for managing the dispute resolution process. With arbitration, dispute management opportunities exist at every stage, from the parties’ original business transaction forward.

Arbitration clause

When negotiating a transaction, the parties should consider whether to have an arbitration clause, what arbitration institution to use, and other details, bearing in mind the kinds of disputes that could arise and what role their own side is likely to play in the dispute.

When an actual dispute arises, one of the parties may prefer arbitration while the other party thinks its chances are better in state court. This can lead to satellite litigation over whether the dispute is subject to arbitration. This can be avoided by proper drafting of the arbitration clause.

This is the first opportunity for the parties to manage the dispute, by selecting the type of arbitration: institutional (before a permanent arbitration court) or ad hoc. If institutional, the rules, fee schedules and so on of the institution will cover many dispute management issues, but the parties may be able to opt out of some of these rules or modify them to suit their needs.

If the parties choose ad hoc arbitration, they will be working from a mostly blank slate. The law provides some default rules, e.g. for appointing arbitrators, but many issues are wide open. As an in-between solution, the parties may select a set of rules unconnected to any specific arbitration institution, such as UNCITRAL Rules.

For institutional arbitration, it is important to choose carefully among the wide range of institutions. What is the profile of the court—general, or specific to a certain field or industry? What are the rules and fees? Does it have an effective case management infrastructure?

To manage disputes properly, the arbitration clause deserves careful attention. Too often it is thrown in at the last minute when the parties are anxious to close the deal—perhaps added by business professionals who are unfamiliar with arbitration practice and confident they will never have a dispute. Everyone says that until a dispute arises!

Ground rules

In arbitration, the parties are ultimately responsible for the procedure. The law provides only certain baseline principles, such as the right to be heard and the equality of the parties.

Procedures may be incorporated into the arbitration clause by adopting the rules of the arbitration institution or UNCITRAL Rules, but they are not exhaustive or tailored to the specific case. The parties may fill in the gaps and exclude or modify certain existing rules. If the parties do not agree otherwise, the arbitrators will set the rules.

Selection of arbitrators

The selection of arbitrators can affect the conduct of the arbitration and even the outcome. The parties must have an equal influence over the selection process—a key to the legitimacy of the process by law and in the eyes of the parties.

Depending on the agreed procedure, the parties may directly appoint the arbitrators themselves. Typically, each party appoints one arbitrator, and those two arbitrators jointly choose a third arbitrator to preside. This is the default solution in the Polish Civil Procedure Code.

Every arbitrator must be impartial—even if chosen by one party. Other desirable traits are open-mindedness, arbitration experience, reputation in the legal or business community, and the availability to hear and resolve the dispute quickly.

The parties may manage the dispute by controlling the expertise the arbitrators should have. For example, they may require arbitrators from specific fields of engineering, accounting, or law. In practice, arbitrators are predominantly lawyers, but if the parties prefer industry experts, they can have them. Arbitration remains a legal process, however, so it is not recommended to exclude arbitrators with a legal background entirely.

The choice of an arbitration institution may mean adoption of institutional rules for selection of arbitrators. For example, the Court of Arbitration at the Polish Chamber of Commerce requires the presiding arbitrator to be selected from an approved list. Other institutions may provide for appointment of some or all arbitrators by the institution, by default, or approval of party-appointed arbitrators by the institution.

Other procedures

Other procedures may be provided for in the arbitration clause, but in practice the parties rarely specify the exact procedures in advance. Thus the parties should become active in setting procedures after the dispute arises, together with the arbitrators, so they feel jointly responsible for the process.

The arbitrators should seek comment from the parties before issuing procedural orders, for example by asking the parties what they think of using written statements instead of live testimony.

The procedural options are broad, and even if the parties and arbitrators cannot agree on all the specifics, the parties should hold the arbitrators’ feet to the fire and get clear guidelines from them at the outset.

The schedule is a key aspect: the overall timeframe, specific hearing dates, dates for submissions, and so on. The parties can have a major influence on scheduling.

Cost control

Costs are an issue arising early on, because when the parties choose an arbitration institution they are also choosing its fee schedule and related procedures. These vary significantly between institutions and may compare favorably or unfavorably with the filing fees that the state court would charge for the same type of case.

In ad hoc arbitration, the parties will have to agree a fee schedule with the arbitrators, but the law does provide certain remedies if agreement on fees cannot be reached.

Management of the dispute—scheduling and other procedures—may have a bigger impact on the overall cost of the arbitration than the fee schedule alone. According to one study, arbitration fees as such account for only 20% of the total cost of arbitration. The rest depends mostly on the duration of the proceeding. This means that the parties should look beyond the initial filing fee and seek to save money through proper deployment of the dispute management techniques offered by arbitration.

Arbitration may be the ideal way to resolve business disputes, but much depends on the parties. To ensure fast, efficient proceedings and a satisfactory result, they can begin managing potential disputes even as they negotiate their business deals.

 

Published in: American Investor, Summer 2013