The name of the Scottish philosopher Adam Smith is inseparably linked to his manifesto on free-market capitalism and the division of labor - An Inquiry Into The Nature And Causes Of The Wealth Of Nations published in 1776. Far less known is his 1759 opus The Theory of Moral Sentiments, which deals with the psychology of morality and from which we have derived the quote in the title. The advice given by Adam Smith addresses the issue of empowerment.
As far as international arbitration is concerned, it has become a common wisdom, and indeed a major concern of its users, that there are no means available to protect their interests at short notice. But is that true? In the present article, we take a closer look at emergency relief mechanisms which have been introduced recently by arbitral institutions such as the International Court of Arbitration of the ICC in their arbitration rules, in particular the ICC Rules.
I. Case Study
Situations arise in which a decision of the arbitral tribunal following a regular or even an expedited arbitration comes too late and where a party, therefore, needs immediate relief. This need can be illustrated by a real-life scenario from the automotive industry.
A tier-1 and a tier-2 supplier are tied together in a delivery relationship with several affiliate companies being involved on both sides. The seats of the involved companies are spread over the world, including Asia, America and Europe. A master agreement between the parent companies of the tier-1 and tier-2 suppliers sets out the terms and conditions for the individual delivery contracts concluded between the affiliates. The master agreement includes a standard ICC arbitration clause.
After some time, the tier-2 supplier becomes dissatisfied with the agreed prices and requests a price adjustment. The tier-1 supplier objects to this request referring to the price agreements in place and the principle of pacta sunt servanda. The tier-2 supplier reacts by threatening to stop delivery if the tier-1 supplier does not accept the adjusted prices within three days. Such delivery stoppage would result in a standstill at several production sites of the tier-1 supplier's customers, exposing the tier-1 supplier to enormous damages claims.
In such a scenario, even an expedited arbitration would not be of any help to the tier 1-supplier. Rather, the tier-1 supplier is dependent on effective immediate relief.
II. Interim Relief in International Arbitration
One option for the tier-1 supplier is to seek interim relief from the competent state courts. Almost all arbitration laws provide that the right to seek immediate or interim relief from state courts is unaffected by an arbitration clause unless the parties have expressly excluded this option.
The major advantage of interim relief by state courts is that a court can swiftly grant an order which, if necessary, can immediately be enforced. It is not uncommon for state courts to issue such an order within hours rather than days on an ex parte basis. Against this background, it has often been said that immediate or interim relief by arbitral tribunals has a subordinate role. This argument is underpinned by the perception that arbitral tribunals cannot react as quickly as state courts - at least if the tribunal is still to be constituted - and that they cannot themselves enforce their orders for lack of iure imperii.
The situation becomes a bit more nuanced, however, if the interim relief is directed against multiple parties seated in different jurisdictions, and if the legal systems in which interim or immediate relief is sought do not all seem to meet the applicant's need for efficiency and reliability. In these scenarios, a request for interim relief by an arbitral tribunal operating under a uniform set of tested arbitration rules may appear more attractive than to seek such relief from several state courts.
Indeed, interim relief from arbitral tribunals has been available for some time as an additional option, however this has always required an arbitral tribunal to which the application can be directed to already be in place. This is often not the case when an urgent and unforeseen situation arises. In the recent past, arbitral institutions have, therefore, included emergency instruments in their rules which address this issue. These mechanisms provide for the possibility of seeking the appointment of an emergency arbitrator on short notice by the institution. Today, among others, the arbitration rules of ICC, LCIA, SCC, SIAC and SCAI all include emergency arbitrator provisions.
In ICC arbitrations, the Emergency Arbitrator Rules apply in all cases in which the arbitration agreement was concluded after 1 January 2012 unless the parties have opted-out or have agreed on another pre-arbitral procedure of a similar nature. Hence, in the above case study the ICC Emergency Arbitrator Rules apply even without express reference to them.
III. Formal Requirements and Procedure
The formal requirements of an emergency application and the procedure under the emergency arbitrator rules of the different institutions are quite similar.
The procedure is initiated by an application, which, if granted, results in an emergency arbitrator being installed by the institution within a short time-limit. For example, in case of the ICC Emergency Arbitrator Rules, the President of the ICC Court shall appoint the arbitrator normally within two days. The formal requirements in the various rules that the application must fulfill largely resemble each other but differ in detail.
Under all rules, the application must contain a description of the circumstances giving rise to the application, a prayer for relief and an explanation as to why the applicant needs urgent relief. There is generally no limitation regarding the type of relief available. Hence, it is also possible to apply for declaratory relief, for performance or for a direction of a third party. Pursuant to the predominant view, it is a matter for the merits of the particular case as to whether the request will be granted in the circumstances at hand.
Some rules contain additional formal requirements. The ICC Rules, for example, allow emergency arbitrator applications only against signatories of the arbitration agreement. Hence, in the case study, an application could only be directed against those affiliate companies which have signed an arbitration agreement. Furthermore, the ICC Emergency Arbitrator Rules require the applicant to file the request for arbitration within 10 days of the ICC Secretariat's receipt of the application if the emergency application was filed before the main proceedings had been initiated. If no request for arbitration is filed within this deadline the emergency arbitration will be terminated.
Once the emergency arbitrator is appointed, he must render his decision within a defined time-limit. In the case of the ICC Emergency Arbitrator Rules, this is within 15 days from the date on which the file was transmitted to the emergency arbitrator.
Other than is often the case in state courts, the party against which the application is directed will normally be heard before the emergency arbitrator will render his decision. Sometimes, even a second round of written submissions takes place. Due to the limited time available, the deadlines set by the emergency arbitrator for those submissions tend to be very short. It has been said that this procedure gives the applicant an advantage over the respondent since he may invest a lot of time in the application before filing it. However, one should not forget that this perceived advantage is counter-balanced by the urgency requirement that the application must meet. An applicant, therefore, cannot unduly wait with the submission of its request for emergency relief.
It is common practice that emergency arbitrators render their orders on a document-only basis. In this case, witness or expert evidence can be submitted by way of written statements. In view of the short time-limits, it is unusual, but not prohibited for witnesses and experts to be examined before the order is rendered. If a hearing is held, this is normally done via video or telephone conference.
If the emergency arbitrator grants the emergency measure it remains in place until the final award is rendered or the arbitration is otherwise terminated. The arbitral tribunal may provide in the final award that certain measures remain in place.
IV. Applicable Standard (Substantive Requirements)
The ICC Rules provide little guidance as to the substantive standards to be applied by emergency arbitrators. Most other institutional rules likewise do not set any specific criteria for granting emergency relief. This bestows a broad discretion on the emergency arbitrator, limited only by general arbitration practice, the lex arbitri and other international guidance.
Yet, like other institutional rules, the ICC Rules generally require that the interim relief sought must be "urgent". No uniform understanding of "urgency" has so far evolved amongst legal scholars and arbitration practitioners. The imminent threat of a delivery stoppage by a tier-2 supplier exposing a tier-1 supplier to serious financial and reputational harm will in most cases meet the requirement of urgency. In particular, the urgency of the interim relief sought is generally not affected by the mere possibility that the tier-1 supplier could avert a delivery stoppage by paying the excessive prices requested by the tier-2 supplier.
The risk of the applicant suffering irreparable harm if the interim relief is not granted is a further criterion considered by emergency arbitrators. In some jurisdictions, this prerequisite refers to the impossibility of recovering the loss or damage suffered by a later award. In other instances, it is considered sufficient that the parties' status quo will be preserved through the emergency order until a final award has been rendered on the merits. In the case study, both standards are met if the tier-1 supplier risks being put out of business as a result of the financial and reputational harm triggered by the threatened delivery stoppage.
As a further criterion, emergency arbitrators commonly take into account the likelihood of the applicant's success on the merits. Typically, this aspect is assessed on a prima facie basis only. Hence, the tier-1 supplier is not required to provide strict proof for the tier-2 supplier's lack of entitlement to a unilateral price increase under the contract.
Finally, emergency arbitrators regularly balance the interests of the parties involved. Usually, the consequences of granting the interim relief for the defendant are weighed against the harm potentially caused to the applicant in case the application is declined. The interest of a tier-1 supplier not to be irrevocably put out of business outweighs the desire of a tier-2 supplier to immediately enforce a requested price increase by threatening with a delivery stoppage.
V. Enforcement of Emergency / Interim Orders
No general statement can be made with regard to the enforceability of emergency orders.
Such orders are generally not considered to be "awards" in the sense of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Some local laws, such as the ones in Hong Kong, New Zealand and Singapore nevertheless expressly provide for the enforceability of emergency orders.
Where the enforceability of emergency orders is not warranted by law, the applicant may request the local state courts for assistance if the defendant fails to comply with an emergency order on a voluntary basis. The non-compliance with an emergency order may also be considered as a breach of the parties' agreement to arbitrate. This can provide an additional basis for the applicant to claim compensation from the defaulting defendant for the resulting loss or damage suffered.
Finally, the self-disciplinary effect of interim relief granted by emergency arbitrators should not be underestimated. A party will consider twice whether it is wise to disregard the interim relief directed against it. Such behavior would not go unnoticed in the arbitration on the merits and may unnecessarily weaken the position of the defaulting party. Indeed, according to the ICC Arbitration and ADR Commission Report on Emergency Arbitrator Proceedings (2019), in the vast majority of the cases the parties have voluntarily complied with the emergency orders directed against them.
In some industries, the users of arbitration more frequently depend on instant fixes than in others. Immediate remedies are regularly needed in the automotive industry when a party is faced with a delivery stoppage potentially causing irreparable harm.
Averting such harm through an emergency arbitrator application is subject to various uncertainties. Emergency arbitrators have a broad discretion when applying the substantive standards to the application. Moreover, the enforceability of emergency orders is not ensured on a global basis. However, some of these uncertainties also leave room for flexible and creative solutions. These are particularly in demand when the parties' interests need to be protected and weighed against each other on short notice.
It thus appears that the potential vagaries of the relatively young institute of emergency arbitration are compensated for by the genuine need for immediate and efficient relief. This need seems to be particularly acute in complex multinational set-ups involving multiple parties domiciled in different jurisdictions. Indeed, ICC data shows an increasing acceptance and use of emergency arbitrator services in a relatively short period of time.
Hence, even where parties are facing multi-layered threats of irreparable harm, they are no longer doomed to surrender to their destiny. Using the words of Adam Smith, it is rather "at all times in [their] power to rid" themselves of any looming trouble by resorting to the available emergency arbitrator proceedings.