Speed, Efficiency, and Flexibility: the benefits of the tradition arbitration system
Jessica L Richardson
Rebekah Barlow Yalcinkaya
Posted Saturday, September 19, 2009

***The views expressed in the interview are the personal views of Mr. Rod McLeod and should not be considered advice of Jones Day.***

Q: What is the primary strength of international commercial arbitration as compared to international litigation? 

A: International litigation involves the formal judicial systems of at least two sovereign countries. International arbitration is the ADR mechanism in the same world context.  Concurrent international litigation does not occur in two separate countries at the same time.  Usually, litigation is in one country even though the witnesses and documents will be in another country. 

One problem with international litigation is enforcement. Obtaining a favorable judgment in one country is no guarantee that the judgment will be respected and enforced within the boundaries of another country. This is especially problematic if the recoverable assets are within that other country. This means international litigation does not provide terribly effective recovery on claims.

International arbitration differs in this respect. Due to the 1958 New York Convention for the enforcement of arbitral judgments ("New York Convention"), if there is arbitration between parties from countries that have signed the treaty, that arbitration is automatically given enforcement powers in the other country.[1] In international litigation, when bringing the judgment awarded in another country, it may require begining the litigation in that forum from scratch. Thus, the primary strength of international commercial arbitration is that it has made the enforcement of judgments much more efficient and effective.

Q: International arbitration is trending toward longer and more costly proceedings.  What is causing this shift and causing arbitration to more closely resemble litigation? 

A: In the early 1980s international arbitration was quite popular and a multitude of business cases were being dealt with in that way.  In terms of number of cases filed worldwide, arbitration began leveling off and decreasing in the early 2000s. This seems strange because the global reach of business, and associated conflicts, have hardly declined.

It is my view that the use of arbitration began to decline because many practitioners were engrafting traditional litigation procedures onto an arbitration process originally designed to be quicker, more efficient, and less costly. Thus, given the way that arbitration evolved, the very benefits of its inception have eroded to a degree.  For example, traditional litigation entails enormous amounts of discovery, depositions, motion work, and some of those are now part of the arbitration process. Arbitration was not meant to be used that way.

I have a traditional view of arbitration.  There should be no motions in arbitration. However, it is currently quite common in domestic arbitrations for arbitrators to accept motions to dismiss and to allow depositions. In international arbitration, such trappings of traditional litigation are also creeping in.  For example, accepting motions, and more recently, allowing e-discovery.  This is a disturbing trend and strays away from the founding principles of arbitration.

Q: Is there a counter movement to restore arbitration to its roots?

I am certainly an advocate for a return to the basics of traditional arbitration but I do not think practitioners are saying, "Look, we've got to change things."  It seems as though the inexorable trend is for international arbitration to become closer to traditional litigation.

I believe it is time for a revolution of sorts. Businesses are questioning whether they should even bother to include arbitration clauses in international business contracts. This illustrates a change in the way businesses view the efficacy of arbitration. 15 to 20 years ago, businesses would have absolutely included an arbitration clause in such contracts. When parties increasingly use litigation tools as part of arbitration, the time to reach judgment increases. This makes businesses skeptical about what they have to gain from including arbitration clauses and utilizing arbitration forums. The more arbitration becomes a litigation look-alike, the less effective it becomes.

Q: Due to technological advances in the computer age, e-discovery is becoming increasingly accepted and utilized in United States litigation.  Under the Hague Evidence Convention, a U.S. court may allow the introduction of private records, such as those procured through e-discovery, even if the information is located in a jurisdiction, such as the European Union, that has privacy directives.[2]  Is there a similar trend in international commercial arbitration as well?

A: The very concept of using e-discovery within arbitration reinforces the notion that parties are morphing arbitration into something that increasingly resembles litigation.  For example, with e-discovery, instead of finding only 100,000 documents through traditional discovery, there are 1,000,000 emails on top of the original 100,000 documents.  Different countries have different proxy laws.  In some countries, if an employee marks an email personal or private at work his company cannot look at it.  Other countries have laws that say no email data can be transferred out of the country. That requires the proceedings to occur in the local jurisdiction.  On the other hand, in the United States, email at work belongs to the company.  Thus, it is possible to get a discovery order from the arbitrators and to get their support for doing document discovery and e-discovery. But, at what price? 

Q: Parties of arbitration agreements may wish to avoid or enforce international commercial arbitration agreements and awards.  In light of the New York Convention and like conventions, under what circumstances might a final decision or award be overturned or modified?          

A: Overturning or modifying a final arbitration decision depends upon which treaty or convention the arbitration agreement is subject to.  Each treaty and convention will have their specific guidelines for reversal or modification; however, the overarching principle of these guidelines is to assure that all parties to an arbitration have a fair opportunity to present their evidence.  For example, the arbitration panel needs to be neutral and the decision maker needs to be neutral. Generally, unless the forum was not neutral or there is evidence of fraud, which is extremely rare, the judgment will stand. 

What I do not like seeing is the losing party of an arbitration automatically bringing a motion to vacate or modify, or an appeal. This is becoming increasingly common despite the fairly limited reasons traditionally used to overturn a judgment. So, here is a private process that was supposed to be streamlined for the good of both parties.  A common scenario is that one party loses and then they leave arbitration rules behind and jump over to the regular litigation track, the appellate track. They do this for tactical reasons.  For example, a party may have a judgment awarded against them for ten million dollars and that party knows that if they appeal, or even threaten to appeal, the other party may be amenable to settling for nine million dollars. Given the aims of arbitration, there is something extremely intellectually unappealing about such a move.

Q: Do you have any suggestions for halting the unappealing trend toward the appealing of arbitration decisions?

A: First off, in drafting arbitration provisions, attorneys should ensure the parties realize there will be no right to appeal. Even though a traditional part of the arbitration concept is that there is no appeal, given the trend to do so, it may be wise to ask the parties to agree overtly in their arbitration clause not to appeal.  The United States Supreme Court, in an interesting decision, denied parties a right to contract for the right to appeal unfavorable judgments in their arbitration agreements.[3] The agreement between the parties essentially said that once awarded judgment, if either party was dissatisfied, they could jump from arbitration to litigation and use the appellate court system.  In denying them the right to do so, the Supreme Court shifted the power of finality back to the arbitral forum.  To me, this case is an example of lawyers trying to get too cute.  Essentially the parties to that agreement were saying, "Let's agree on arbitration for the resolution of disputes, but we are also going to agree that if one of us doesn't like the outcome then we are able to appeal the judgment in litigation."  

Q: With arbitration increasingly resembling litigation, is ad hoc arbitration a solution to revive the traditional benefits of arbitration?

A: Ad hoc arbitration has emerged as a means to restore arbitration to its roots. Because of the cost of many arbitral institutions and the expanded length of time to judgment, there is a discernable increase in the number of companies willing to engage in ad hoc arbitration.  This typically occurs when Company A and Company B have experience in arbitration. The companies agree to use a certain institution's rules, such as the Model Law.  What is most significant about ad hoc arbitration is that the parties administer it themselves-they select the arbitrator, they handle the payments, and they do all the scheduling together. This has worked well because it cuts down the administrative costs and increases flexibility, both of these being primary benefits of traditional arbitration. So, even for those companies disenchanted with arbitration as currently practiced, the ad hoc arbitration route is not something that they should automatically discard.

However, for the very reason ad hoc arbitration can be so successful, it can also result in inefficiency.  The efficacy of ad hoc arbitration depends on the experience of the attorneys representing the parties.  If there is no institution to move the proceedings along, all it takes is one party to stall the process.  It takes two cooperating parties to make the process efficient. 

Q: What amendments, if any, would you suggest for the UNCITRAL to make international commercial arbitration more efficient?  How can the arbitration process be more efficient?

A: I would like to see a provision included in the UNCITRAL Model Law exhorting the parties to accept as their duty a good faith effort to make the arbitration process as efficient as possible.  Right now, there is nothing of the sort.  The process would remain the same, but ultimately it is the parties that drive the process. Somebody or some instrument needs to remind them of their duty of efficiency.

As for making the arbitration process more efficient, there are three stages at which attorneys can weigh in to make the process more efficient: (1) the arbitration clause drafting stage; (2) the pre-arbitration hearing stage; and (3) during the hearing stage.

First, attorneys can make the process more efficient in the arbitration clause drafting stage.  As it stands now, there is a tendency to give the arbitration clause a short shrift.  So the clauses tend to be extremely brief, having only two or three sentences stating that the parties agree to arbitration in a particular country under the rules of a particular treaty or convention.  That's it.  There are so many ways to improve upon this.  

For example, the arbitration agreement could include a stipulation that there be a 60 day mediation period before either party files for arbitration. Likewise, it could specify that there will only be one arbitrator.  The parties could also agree in the clause to limit discovery, only allowing each other three depositions. They could agree on the length of the arbitration, should it become necessary. There could even be a provision mandating that the parties further agree to confer at appropriate times during the arbitration process on ways to make the arbitration more efficient. In essence, the addition of any of these would result in the parties agreeing upfront to make the process more efficient. Unfortunately, there is not enough attention given to how the process can be structured more effectively before it is utilized.

Second, attorneys can also aid the efficiency of the process at the pre-arbitration hearing stage. The pre-arbitration hearing is essentially a case management scheduling conference. Here, once someone files a claim in arbitration, the other side gets to answer.  This poses an opportunity for attorneys to reach an agreement, and with the support of the arbitrator, to make this process efficient. 

For example, the parties could agree to two weeks of arbitration with each party allowed one week. The parties could also agree to no depositions.  They could agree that if documents were not produced or exchanged in a timely manner that they cannot be used as an exhibit. The parties could also stipulate that the arbitrator will issue a final decision within thirty days.  Working out agreements such as these at the pre-arbitration hearing stage can begin to shape the arbitration in a way that will make it more cost effective.

Finally, attorneys can also shape the arbitration in these same critical ways during the hearing stage. There is nothing at the hearing stage to prevent you from raising the same issues.  For example, usually during an arbitration both parties file an arbitration brief.  Well, why not have the parties agree that the brief will only be twenty pages? Regardless of the amount of damages sought by a party, I believe that if you can't put your spin on what the facts are in twenty pages you are not going to be able to do so in fifty.

Another provocative idea is to eliminate closing briefs.  The arbitrator is paid to sit and listen to all of the evidence.  In my experience, by the end of the arbitration, an experienced arbitrator has already made up his or her mind.  So why do the parties submit closing briefs two weeks after the evidence is presented?  It is unlikely that a closing brief will change an arbitrator's mind after all of the evidence has been presented.  Therefore, in my practice I like to suggest to opposing counsel that we dispense with closing briefs because it is more economically efficient and clients are always open to greater efficiency.

[1] The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958 (hereinafter "New York Convention").

[2] See, E.U. Privacy Directive and Societe Nationale Industrielle Aerospatiale v. United States District Court for the Southern District of Iowa. 482 U.S. 522 (1987).

[3]  Hall Street Assoc., LLC, v. Mattel, Inc.  128 S.Ct. 1396 (2008).