Arbitration is an efficient means for resolving business disputes because it offers more flexibility than court proceedings and enables the parties to choose arbitrators experienced in a domain relevant to the dispute. In principle, arbitral awards are enforceable, with only limited grounds for objection, in more than 150 jurisdictions that have ratified the New York Convention on Recognition and Enforcement of Arbitral Awards of 1958.
Despite these benefits, complaints that arbitration has become too expensive are on the rise. For arbitration to continue to adequately serve its purpose, it must be time and cost-effective. Cost-efficiency can be obtained through advance planning and better cooperation between parties and their lawyers.
A Clear Arbitration Agreement
More often than not, the arbitration clause is the last and least considered clause in a contract, and therefore commonly referred to as the midnight clause. Yet the importance of a clear, simple arbitration agreement, tailored to the specific feature of a transaction, cannot be overstated. A well-drafted arbitration clause prevents uncertainty and disputes over its meaning, scope and effect, e.g., the jurisdiction of the arbitral tribunal or the process of appointing arbitrators.
Choosing to submit a dispute to institutional arbitration rules—for example, those of the International Chamber of Commerce, the London Court of International Arbitration or the American Arbitration Association—is also an effective way to limit arbitration costs. Institutional rules typically offer arbitration administration services that are based on cost-efficiency. For example, some rules set the administrative and arbitrators’ fees on the basis of fixed scales, rather than time spent. The institutions themselves closely monitor the financial aspect of the cases they administer, in order to discourage lengthy procedural timetables.
Careful Selection of Arbitrators
A tribunal with strong case-management skills will be able to manage the arbitration so as to make it as cost- and time-effective as possible. Careful consideration should therefore be given to selecting tribunal members, with particular attention paid to their previous experience as arbitrators.
In addition to considering the arbitrators’ case-management skills, it is essential to ensure that the arbitrators selected have sufficient time to devote to the case. Even the best arbitrator is unable to effectively administer an arbitration if he or she does not have the time available to do so. It is also important to nominate arbitrators with no conflict of interest, and whose risk of a conflict arising in the course of the procedure is limited, in order to prevent the delays that can result from objections to an arbitrator’s confirmation or appointment.
Efficient Management of Hearings
Because hearings in international arbitration often necessitate travel and a considerable time commitment by the arbitrators, the parties and their lawyers, they can be the most costly elements of an arbitration. According to a 2011 survey by the Chartered Institute of Arbitrators, hearing costs account for 37 per cent of total external legal fees incurred by arbitration parties. It is therefore advisable to consider whether or not it is possible for the arbitral tribunal to decide the dispute on the basis of documents alone, without a hearing.
Where hearings are necessary, minimizing their length and number might considerably reduce arbitration costs. Hearings also do not necessarily have to be held at the place of arbitration. The parties and the arbitral tribunal can instead agree to hold hearings at a place they deem more cost-effective, such as a location that is convenient for the majority of the witnesses due to give evidence.
Arbitrators are frequently empowered with the discretion to award legal costs based on the reasonableness of those costs, among other factors. The recent, much-publicised Yukos award, for example, noted that some of the fees charged by the claimants’ experts were excessive, observing that their evidence was of “limited assistance” to the tribunal in determining damages.
Cooperation Between In-House and Outside Counsel
Cooperation between in-house and outside counsel is another important factor in reducing arbitration costs. In-house counsel can, and should, play an active role in the arbitration process by attending case-management conferences and deciding on the procedure to be adopted. In certain cases, discovery-style document production, or an additional round of briefs, might produce benefits justifying the associated time and costs; but in others they might not. In-house counsels are often in the best position to make this call in collaboration with their external counsel.