There are, in every arbitration, at least four parties and four sets of counsel.
Two of them are very familiar to all of us. They are the claimant and the respondent – once the dispute has crystalized, the disputing parties – and their counsel in that dispute, claimant’s counsel and respondent’s counsel. But there are two other parties and two other sets of counsel. They are the transactional contract counterparties – back when the contract or transaction was being put together. When we were all optimists.
There were never going to be disputes. If there were going to be disputes, the disputes had to be dealt with quickly and inexpensively so that the parties could get on with the business of performing the contract and fulfilling the transaction requirements.
And their counsel, the transactional counsel. The transactional counsel, of course, take direction from the transactional parties.
We know that there are structural incentives. The disputing parties and the disputing counsel – once a dispute has arisen, each side has an incentive to win or at least not to lose. Disputing counsel are responsive to the interest of their parties. And both disputing parties and disputing counsel are knowledgeable about the risks of not pursuing every reasonable avenue for success. They’re concerned about the personal and business consequences of not doing so. They may be cost-averse, indeed they often are cost-averse, but they are far more likely to be inured to the costs of dispute resolution than the transaction parties were because they are much more knowledgeable about dispute resolution.
What about the transactional parties, the contract and counterparties and their counsel? Well, they are much more optimistic. These parties are just entering into a relationship that they believe will bring success and profit. They are not generally thinking about disputes (except in the largest transactions where there are teams of lawyers and parties who often work very hard to try to think through risk allocations). But most transactions, and particularly the small and medium business transactions that Delos is focused on, don’t have those big legal teams. Those transactions do not have a specialist in risk allocation involved in contract negotiations. Transaction parties are people who are focused on the success of their venture.
The transaction parties and transaction counsel, when they turn to the portion of the contractual relationship that deals with dispute resolution, are receptive to the idea of controlling costs, controlling duration, and continuing to keep the transaction together notwithstanding disputes. They are committed to an alignment of interests that tries to minimize disputes and overcome disputes when they inevitably arise. And, being a former transactional counsel myself, I must admit transactional counsel are not often knowledgeable about dispute resolution or seeking ways to control litigation costs. Transactional counsel are the source of many of the arbitration clauses that just don’t work. And, I confess, when I began teaching international business transactions at Georgetown, I would often tell my students that one function of the course was so that they would learn not to commit the malpractice that I regularly committed during my decades of practice as a deal lawyer.
Now let’s stop for a moment thinking about the parties, and turn to thinking about the arbitrators. Typically, arbitrators are selected in a process that is often controlled by counsel for the disputing parties. And arbitrators make their reputation by being known to counsel for the disputing parties, perhaps even by attending conferences and symposium, participating in task forces and giving keynote speeches.
They are sensitive to having their decisions, awards and orders challenged for lack of an opportunity on the part of a party to present its case or lack of mutual consent by the parties to the process that is being ordered by the arbitrator. Arbitrators are reluctant to emphasize controls over costs and time unless there is mutual buy-in from the disputing parties and their counsel.
That result is not surprising, because the arbitrators are selected once the dispute is crystalized. And the work product that arbitrators produce is really only subject to attack for either lack of consent or lack of due process in some form or another. So, they are extremely sensitive to those concerns.
That is the environment within which most arbitrations today take place. But there is also a broader environment that is worth thinking about as well.
International arbitration has been very successful. It has grown during our professional lives. It has grown deeper in those jurisdictions where arbitration has always been welcomed. So, illustratively, it is not unusual today to find more than just counsel from New York, Washington, Boston, San Francisco or Chicago. We might find counsel from Atlanta, Miami, Cincinnati and etc. Those counsel, of course, do not spend the entirety of their time on international arbitration, unlike the speakers at this event. Those counsel may spend only a relatively small portion of their professional time on international arbitration.
Similarly, international arbitration has grown broader. Where, once upon a time, there were a limited number of countries that were seen as arbitration-friendly, today the range of countries that now accept international arbitration, particularly commercial arbitration, has grown dramatically. We now see very active arbitration communities in Korea, China, Chile, Nigeria, Serbia, Mexico, etc. where once upon a time we only saw it in England, France, Germany, Belgium etc. More recently, the United States – we are in fact relatively new entrants into the world of international arbitration. It is worth recalling that the New York Convention was finalized in 1958, but the United States did not accede to it until 1970. So, we are relative newcomers here in the U.S.
Broader and deeper.
The effect of the success of international arbitration growing broader and deeper means that there are a lot of new entrants into the world of arbitration, particularly among counsel who do not spend the entirety of their time on international arbitration. Indeed, they may only spend a relatively small period of time during their professional lives on arbitration, one case a year or something like that.
It is not surprising, then, that counsel of that nature will bring into arbitration their national preconceptions – how litigation is undertaken in their national courts. Like turtles carry shells on their back, they bring those preconceptions into the disputes. Those preconceptions carry with them a fair amount of procedural activity. The famous “Americanization” of international arbitration is one example of this. Think about motion practice, document production, highly adversarial processes, challenges to arbitrators. That is a reflection of the litigation environment in the United States. But “Americanization” is part of globalization – there is no reason to think that, for example, Brazilian counsel, Chinese counsel, Korean counsel or Nigerian counsel will not also bring into their arbitral tribunals their own preconceptions about how disputes are resolved in the forums they are most familiar with, their own national courts.
So, four disputing parties and transaction parties, four sets of counsel, and globalization producing deeper and broader access to international arbitration. It is no surprise that the cost and duration of arbitration have grown substantially over the decades as these tectonic shifts have played out. Nor is it a surprise that arbitration increasingly resembles national litigation, with the particular resemblance depending on the identity of the participants in the particular arbitration. And, as we well know, at least 80% of the out-of-pocket costs and expenses of arbitration are attributable to counsel and expert expenses, not to the arbitral institution and the arbitrator.
If that is the direction in which arbitration has gone, what can be done to control costs and time? That topic is obviously something that the arbitration community has come to care about, as arbitration’s promise of “faster and cheaper” has dissipated. Well, given what I’ve just told you, it should be easy to see the steps that I believe should be taken.
Empower the transaction parties and transaction counsel to place cost and duration parameters upfront on the disputing parties, the disputing counsel and the arbitrators. Limit the scope of what the disputing parties can do (who have the incentive to find every way to win or at least not lose, with attendant costs and extensions of time) by empowering the transaction parties and their counsel (who have incentives to control those costs and that time). That is, candidly, what I think the Delos process does.
Let’s look at the four principles of the Delos environment. First, active engagement of arbitrators. Well, it is fine to say that – indeed every institution says the same thing. But what the Delos Arbitration Rules do is build that principle into the arbitration agreement from the beginning, unlike other arbitral institutions, who only provide a wide range of possibilities in their rules. The arbitration rules of those latter institutions hope that an arbitrator will swim against the tide and use their discretion to control costs and time.
Second, safe seats. One way to control time and costs is to produce additional finality for arbitrations – to not invite the parties to attack the finality of the arbitral process in national courts. Illustratively, I am chair in an arbitration in which the time to finish it up has taken twelve years. Ten of those years were spent by the parties in the U.S. District Court for the Southern District of New York, and only two of them under our control as arbitrators. By identifying safe seats, Delos identifies those jurisdictions that are more likely to protect the arbitral process and to protect the finality inherent in the offer of arbitration.
The third principle: pragmatic formation of the tribunal. That is a wonderful phrase! But all it really means is minimizing the amount of time it takes to create the tribunal and the time it takes to deal with a challenge to an arbitrator. Creating a tribunal, dealing with challenges – those take an unfortunately extended period of time far too often in commercial arbitration.
And then the last Delos principle: preparation, preparation, preparation. Well, what do I mean by that? Let’s turn to some examples from the Delos Rules that illustrate this last principle. If we dig into the Delos Rules, we will see that Delos has offered model forms of notices of arbitration, model notices of defense and counterclaim, and model replies to defenses and counterclaims. Each of those filings is subject, in the Delos Rules, to page limits and exhibit limits.
If a party prepares its claim or defense in advance, that party will be able to fit within those page limits and those exhibit limits. If, instead, the party comes up to the moment where it is required to file its notice of claim or defense, or counterclaim, without having done that adequate preparation, then the safest thing to do is to double or triple the amount of material the party provides to the institution and the arbitrators, for fear of missing something.
So, that is an example of the impact of the Delos Rules on preparation. But there are other examples where the transaction parties and their counsel, by agreeing in the contract to the Delos Rules, have set parameters around what disputing parties, disputes counsel and arbitrators can do. Obviously, the presumption of a single arbitrator for smaller matters is very important. So too the tiers based on size for time periods. But, even for larger arbitrations, the time periods are serious, short, and controlled by Delos. That is a very important thing to recognize. So too for selecting the arbitrator and challenging the arbitrator.
As for dispositive motions and rulings without an oral hearing, there is not silence on these points in the Delos Rules. Instead, there is an express statement to arbitrators, “you can do this.”
So, coming all the way back to my basic point, there are indeed at least four parties and four sets of counsel in every arbitration, no matter how big or how small. If we want to control costs and the duration of a proceeding, give power to the transaction parties and their counsel to limit what the disputing parties and their counsel, and the arbitrator can do. In that way, the structural incentives are set by the parties who have an incentive to control costs and to control duration – and not set by the parties who have an incentive to explore every reasonable avenue to win or avoid losing.