Is Institutional Arbitration Worth the Expense? – An Asian Perspective.

[Rishabh Malaviya]

The author is an LLM (International Arbitration & Dispute Resolution) student at National University of Singapore.

Introduction

Every arbitration is conducted within the framework provided by the lex arbitri (law of the place of arbitration). Complementary to the lex arbitri is the choice of the mode of arbitration, i.e. parties make a choice between conducting the arbitration on an ad hoc basis or conducting it under the aegis of an arbitral institution.This essay has been divided into three parts. In the first part, the additional costs of institutional arbitration (with specific reference to institutional arbitration by the Singapore International Arbitration Centre (“SIAC”), the Hong Kong International Arbitration Centre (“HKIAC”), and the Mumbai Centre for International Arbitration (“MCIA”)) and (despite this) the preference for institutional arbitration are highlighted. In the second part, I underscore some of the perceived advantages of institutional arbitration, and compare this model to ad hoc arbitrations. In the third part, I conclude by attempting to answer the question, ‘Whether institutional arbitration is worth the expense?’.

Part I: The Costs and the Contradiction

Institutional arbitration, of course, imposes additional costs on the parties. These costs are in addition to the regular expenses (like tribunal fee and expenses for hiring rooms for hearing, etc.) that would be incurred in ad hoc arbitrations as well. Parties are usually required to pay a ‘filing’ or ‘registration fee’ along with an ‘administration fee’. This latter fee is usually calculated on an ad valorem basis, while the former represents a fixed sum. For example, the SIAC provides for a filing fee of S$2000 for overseas parties, and for an administration fee ranging from S$3800 to S$95000 depending on the sum in dispute.[1] The HKIAC provides for a registration fee of HKD 8,000, and for an administrative fee ranging from HKD 19,800 to HKD 400,000.[2] In turn, the MCIA provides for a filing fee of Rs. 40,000, and an administration fee ranging from Rs. 110,000 to Rs. 4,160,000.[3]

Ordinarily, these additional costs would discourage parties from opting for institutional arbitration. In fact, as per a 2015 survey, 68% of respondents considered costs as one of the three worst characteristics of international arbitration.[4] Despite this, and counter-intuitive though it may seem, there seems to be a preference among parties for institutional arbitration for the resolution of their disputes. A 2008 study found that 86% of awards were rendered under institutional rules.[5] The above-mentioned 2015 survey found the figure to be 79% of respondents’ arbitrations over the preceding 5 years.This is also reflected in the massive surge in the number of cases handled by institutions over the years. In 2016, 343 new cases were filed with the SIAC, up from 90 in 2006.[6] The HKIAC saw 271 new arbitration cases filed in 2015.[7] The MCIA is a relatively new institution, but is receiving immense support from the local government.[8]

Part II: ‘Off the Peg’ v. ‘Tailor Made’

The above-mentioned statistics make one wonder why parties who dislike the notion of steep costs in international arbitration, concurrently prefer the more expensive institutional arbitration. Of course, institutional arbitration has several advantages.

To begin with, it is conducted in accordance with a set of pre-existing and time-tested procedural rules, administered by experienced staff.[9] This ‘reduces the risk of procedural break-downs, particularly at the beginning of the arbitral process’.[10] This is because once parties agree to abide by institutional rules, they do not need to keep agreeing on every aspect of the arbitral procedure. For example, institutional rules contain detailed provisions for the appointment of an arbitrator, if the parties cannot agree on a procedure for appointment or if any party/arbitrator fails to act in accordance with an agreed procedure. The SIAC Rules empower the President of the SIAC Court of Arbitration to appoint the arbitrator where the parties fail to nominate an arbitrator or fail to agree upon a nominee.[11] The HKIAC Rules confer similar powers on the HKIAC;[12] and the MCIA Rules confer the power on the Council of Arbitration of the MCIA.[13] The significance of these provisions is that if the parties face difficulties in appointing an arbitrator, there is no need for them to resort to the provisions of the governing lex arbitri to overcome such difficulties. This can be especially advantageous in situations where the lex arbitri provides for appointment of the arbitrators by national courts (for example, the (Indian) Arbitration & Conciliation Act, 1996, provides for the appointment by courts).[14] Parties would not need to waste time and money in protracted court proceedings (on average, a contractual dispute takes 1420 days to resolve in the courts of Mumbai, and costs 39.6% of the claim amount)[15].

Further, institutional rules lay down strict qualifications for arbitrators and often have a highly-reputed panel of arbitrators from which the parties may choose.[16] Typically, the appointment of arbitrators is subject to the confirmation of the institutional authorities.[17] Further, challenge procedures under institutional arbitration rules usually impose substantial additional costs on the parties.[18] It is submitted that these provisions ensure that highly qualified arbitrators are appointed in the proceedings, and that the parties think twice before raising frivolous challenges to the appointment of arbitrators. Incidentally, arbitrators’ fees are also ordinarily fixed by the institution, which precludes awkward negotiations about the same.

Another advantage of institutional arbitration is that the institutional rules contain detailed provisions on consolidation and joinder of parties.[19] National arbitration legislation usually does not specifically deal with such issues and the UNCITRAL Model Law, in particular never intended to regulate matters such as consolidation.[20] Therefore, these provisions in the rules provide valuable guidance to arbitrators dealing with these issues.Additionally, institutional rules include innovative procedures such as expedited proceedings and emergency arbitrations. Provisions on expedited proceedings allow tribunals, in some circumstances, to consist of a sole-arbitrator, and the proceedings to be completed within truncated timelines (usually six months).[21] Provisions on emergency arbitrators allow parties to apply for emergency interim relief, even before the final tribunal is constituted.[22]

Furthermore, during the arbitral proceedings, institutional rules impose specific obligations to maintain the confidentiality of the proceedings.[23] Such provisions are absent in the Model Law (although, some national regimes impose specific obligations- Singapore for example, imposes confidentiality obligations as part of its public policy)[24]. Finally, towards the end of the arbitral proceedings, some institutional rules provide for scrutiny of the draft award by the respective institutional authorities.[25] This serves as a measure of ‘quality control’ and prevents any serious lapses by the tribunal in making its award.[26] Moreover, arbitral institutions also lend their prestige to the awards rendered under their rules, which may help in their enforcement.[27]

Ad hoc arbitrations, on the other hand, eliminate the extra expense of institutional fees. They provide greater flexibility to the parties to shape their own procedure. On the assumption that parties are willing to cooperate, the difference between ad hoc arbitrations and institutional arbitrations is akin to the ‘difference between a tailor-made suit, and one that is bought off the peg’.[28] This essentially means that parties may find it a better fit to tailor the arbitral procedure according to their specific needs.

The devil, however, lies in the details. The greatest disadvantage of ad hoc arbitrations is that it usually relies on the cooperation of the parties, and their agreement on the specifics of the arbitral procedure.[29] Such a consensus may be difficult to obtain, especially in cases where the parties must agree after a dispute has arisen. Basing arbitral authority on the continued agreement of the parties also allows for delaying tactics by either party, as the entire process may be stalled by refusing to cooperate.[30]

Part III: Is Institutional Arbitration Worth the Expense?

Thus, on a cost-benefit analysis, which form of arbitration should commercially aware and cost-conscious parties opt for? There seems to be a wide-spread preference among international practitioners for the more structured, predictable nature of institutional arbitration.[31] The author agrees that in most cases institutional arbitration would be worth the added expenses. A party would be more likely to obtain a time-bound and enforceable award, irrespective of the cooperation (or lack thereof) of the other party.

However, it must also be noted, that parties can overcome the disadvantages of ad hoc arbitration by agreeing to rules such as the UNCITRAL Arbitration Rules, which were specifically designed for use in ad hoc international commercial arbitrations.[32] These rules are similar to the institutional rules in the sense that they lay down a fixed procedure to be followed in the conduct of the arbitration. While this may take away from the flexibility of ad hoc arbitrations, it offsets the risk of procedural breakdowns due to non-cooperation of one of the parties. It is submitted that opting for these rules may be a viable alternative for parties that want the best of both worlds- i.e. the predictability of arbitrating under institutional rules and the reduced expenses of ad hoc arbitration.

[1] SIAC Schedule of Fees, available at http://www.siac.org.sg/estimate-your-fees/siac-schedule-of-fees.

[2] HKIAC Schedule of Fees 2015, available at http://www.hkiac.org/arbitration/fees/administered-arbitration-fees/2015-schedule-of-fees.

[3] MCIA Schedule of Fees, available at http://mcia.org.in/mcia-schedule-of-fees/.

[4] 2015 QMUL International Arbitration Survey: Improvements and Innovations in International Arbitration.

[5] 2008 QMUL International Arbitration Study- Corporate Attitudes and Practices: Recognition and Enforcement of Foreign Awards.

[6] SIAC Annual Report 2016, available at http://www.siac.org.sg/2013-09-18-01-57-20/2013-09-22-00-27-02/annual-report.

[7] HKIAC Annual Report 2015, available at http://www.hkiac.org/about-us/annual-report.

[8] http://indianexpress.com/article/business/economy/maharashtra-government-makes-institutional-arbitration-mandatory-for-contracts-above-rs-5-crore-4604321/

[9] Gary Born, International Commercial Arbitration, 2nd Edition, p.171.

[10] Gary Born, International Commercial Arbitration, 2nd Edition, p.171.

[11] Rules 10 & 11, SIAC Rules 2016.

[12] Art.7 & 8, HKIAC Administered Arbitration Rules.

[13] Rules 8 & 9, MCIA Rules, 2016.

[14] Section 11, Indian Arbitration and Conciliation Act, 1996.

[15] The World Bank, Ease of Doing Business in India, available at http://www.doingbusiness.org/data/exploreeconomies/india.

[16] Rule 13, SIAC Rules 2016; Art.11, HKIAC Administered Arbitration Rules; Rule 6, MCIA Rules, 2016.

[17] Rule 9, SIAC Rules 2016; Art.9, HKIAC Administered Arbitration Rules; Rule 7, MCIA Rules, 2016.

[18] SIAC Schedule of Fees; HKIAC Schedule of Fees.

[19] Rules 7 & 8, SIAC Rules 2016; Art.27 & 28, HKIAC Administered Arbitration Rules; Rule 5, MCIA Rules 2016.

[20] See Working Group II, 3rd Session, UN Doc A/CN.9/216, pp. 36-37, para.37.

[21] Rule 5, SIAC Rules, 2016; Art.41 HKIAC Administered Arbitration Rules; Rule 12, MCIA Rules, 2016.

[22] Schedule 1, SIAC Rules, 2016; Art.23 HKIAC Administered Arbitration Rules; Rule 14, MCIA Rules, 2016.

[23] Rule 39, SIAC Rules 2016; Art.42 HKIAC Administered Arbitration Rules; Rule 35, MCIA Rules, 2016.

[24] AAY & Others. v. AAZ, [2011] 1 SLR 1093.

[25] Rule 32, SIAC Rules, 2016; Rule 30, MCIA Rules, 2016.

[26] Nigel Blackaby, Constantine Partasides, et al., Redfern & Hunter on International Arbitration, 6th edition, para. 1.152.

[27] Lew, Mistelis, Kroll, in Comparative International Commercial Arbitration (2003).

[28] Nigel Blackaby, Constantine Partasides, et al., Redfern & Hunter on International Arbitration, 6th edition, para. 1.143.

[29] Nigel Blackaby, Constantine Partasides, et al., Redfern & Hunter on International Arbitration, 6th edition, para. 1.145.

[30] Nigel Blackaby, Constantine Partasides, et al., Redfern & Hunter on International Arbitration, 6th edition, para.1.145.

[31] Gary Born, International Commercial Arbitration, 2nd Edition, p.171.

[32] Gary Born, International Commercial Arbitration, 2nd Edition, p.173