Future Leaders - Arbitration Roundtable

Future leaders Anna-Maria Tamminen of Hannes Snellman, Lars Markert of Gleiss Lutz and Roland Ziadé of Linklaters discuss a landmark ICC initiative, the growth of SIAC and HKIAC as preferred arbitral seats, third-party funding and the changing legislation of less established arbitration forums.

What is your response to the ICC decision, announced in January 2016, that for arbitrations registered after 1 January 2016 arbitrators will have to submit awards to the ICC Court for scrutiny within three months of the final substantive submission, or face a reduction in their ad valorem fees unless the delay can be justified?

Anna-Maria Tamminen: In the majority of cases this is a welcome development. It forces arbitral tribunals to keep track of a case prior to the hearing and reserve time for award drafting in advance. I recognise that in very large cases a three-month period is not very long; however, even in such cases the three-month period encourages better case-management. Some challenges may also present themselves if the timetable of the case shifts due to the parties’ settlement negotiations. However, overall this is a very welcome development.

Lars Markert: As a general matter, the initiative of the ICC is commendable. It makes sense to incentivise arbitrators to write awards while the impressions of the arbitral proceedings are still somewhat fresh and present. From personal experience I can say that this monetary incentive does impress arbitrators and may be more effective than some of the other recent efficiency initiatives on the market. Of course, it will be important to limit reductions to truly unjustified delays – there may be intervening settlement negotiations or complex cases in which a three-month deadline might not be realistic. Much will depend on how strict the ICC will be in applying the criterion of unjustified delays. An issue that will need to be resolved by the ICC is when only one uncooperative arbitrator out of three delays issuance of the award, eg, because he or she does not comment on a draft award for several weeks. Concerned arbitrators should not forget that the ICC’s initiative is somewhat balanced out by a possible uplift in arbitrators’ ad valorem fees in the event of particularly expeditious proceedings, and a reduction of administrative fees in the case of unjustified delays in the scrutiny process at the ICC Court, announced in summer 2016. The latter is important because delays in the ICC’s scrutiny have irritated some of Gleiss Lutz’s clients at least as much as arbitrators’ delays in issuing awards.

Roland Ziadé: The ICC decision of January 2016 may be seen as a logical extension of the ICC’s various initiatives over the past few years to encourage parties and arbitrators to use various techniques to control time and costs. In particular, in December 2015, the ICC published a Report on Decisions on Costs describing current approaches and practices and aimed at showing how arbitrators may use their powers to allocate costs in a way that promotes the effective and efficient conduct of arbitration proceedings.

The novelty of the January decision is that the Court has now stated clearly and more precisely what the impact is likely to be if the arbitrators do not submit a draft award to the Court within three months (two months for a sole arbitrator) following the latest hearing or submission. The Court may reduce the remuneration of arbitrators by anything from 5 per cent to more than 20 per cent, depending on the extent of the delay. These figures constitute a benchmark and provide some foreseeability for arbitration users, while keeping the process flexible as the Court will determine what level of reduction, if any, to apply on a case-by-case basis. This new policy constitutes a further incentive for arbitrators to expedite proceedings. As an additional step toward greater transparency and efficiency, the Court announced in July this year that it would also reduce its own administrative fees in the case of unjustified delay in the scrutiny process.

For parties considering various types of dispute resolution mechanisms and arbitral institutions, this initiative on the part of the ICC provides further evidence of the institution’s responsiveness to cost and efficiency concerns expressed by users of arbitration and of its determination to address such concerns.

It was reported that the trend for Asian jurisdictions, such as Hong Kong and Singapore, as preferred arbitral seats has increased over the last year. How will this impact “traditional” arbitration venues? Where do you anticipate that growth will happen next?

Anna-Maria Tamminen: I believe that jurisdictions such as Hong Kong and Singapore are preferred seats mainly for two reasons: the first being the share of the world’s business being conducted in Asia; and the second, the innovative improvements undertaken by the institutes in the Asian growth centres. I believe that this development of the big-ticket cases moving closer to where the business is conducted will continue. It is also reflected in how the major institutes have opened offices in the business growth centres of the world to be closer to the users of arbitration. At the same time, the medium-sized regional cases are likely to still be resolved close to where the business activity takes place. In terms of growth, I do think Asia will continue to grow next year. In the longer term I believe we will see more activity in Latin America. It will also be interesting to see if London’s status will be affected by Brexit.

Lars Markert: During my secondment to Japan from 2012 to 2014 I witnessed this remarkable trend first-hand. Gone are the times when in European-Asian business relations the parties quickly agreed on a seat in Geneva, Paris or Frankfurt – Asian parties will now frequently insist on seats that are closer to their home jurisdiction. While the “traditional” arbitration venues remain strong by catering to a large international market, they risk losing a slice of the growing Asian market if they do not offer the same “package” of dedicated hearing facilities, active arbitral institutions with cutting-edge rules, an arbitration-friendly judiciary and arbitration law and, not least, the same level of international promotional efforts directed at the users they want to attract. When just focusing on arbitral seats, future growth beyond the established players is hard to predict. While Africa, Latin America and Asia generally are all growth regions for international arbitration, many particular jurisdictions lack one or several elements in the above-mentioned “package” (often the arbitration-friendly judiciary) to make them a natural choice as an arbitral seat. To me, the most likely candidate to catch up to the established players in the wake of Hong Kong and Singapore’s success is South Korea. Just this year, it revised its arbitration law, while its leading arbitral institution, the KCAB, modernised its international arbitration rules. With the Seoul IDRC, a dedicated hearing centre is now available. South Korea also has a judiciary which, after two somewhat worrying decisions, now seems to be on the right track.

Roland Ziadé: Singapore and Hong Kong are indeed becoming increasingly popular due to the local arbitration legislation and case law being increasingly favourable to arbitration (eg, the Hong Kong Court of First Instance issued its first anti-suit injunction in favour of arbitration last year) and major Asia-based arbitral institutions having updated and improved their arbitration rules.

However, London and Paris remain the first two most frequently chosen seats, according to the latest Queen Mary, University of London/White & Case Survey on Improvements and Innovations in International Arbitration (2015). Hong Kong is third, and Singapore fourth in the order of preferred seats. Traditional seats, such as London, Paris or Geneva, should succeed in maintaining their prevalence; as found by the aforementioned survey, a user’s preference for a seat is predominantly based on the seat’s established formal legal framework, ie, the neutrality and impartiality of the legal system, the national arbitration law and its track record for enforcing agreements to arbitrate and arbitral awards. The traditional seats have had, for years, a very stable legal framework with an approach clearly favourable to arbitration and a track record of enforcing agreements to arbitrate and arbitral awards. This is unlikely to change.

The fact that other seats are modernising their arbitration rules to respond to users’ demands for reducing time and cost brings a healthy competition, especially as the more traditional seats are also improving and modernising their rules.

Other places could aim to play an even more important role in the future, such as the UAE. However, for this to occur, it is essential that the UAE enacts a modern and arbitration-friendly law. Further, more consistency and predictability would be expected from the judiciary, which still too often alternates between liberal decisions and more restrictive or even regressive rulings.

Many of those we spoke to expect the rise in third-party funding to continue over the next year, and become mainstream for arbitration cases. Some concern was expressed that funding can at times give credence to unmeritorious claims. In the light of this criticism, how do you view the rise of third-party funding? What advantages and disadvantages do you see it bringing?

Anna-Maria Tamminen: I believe that the concern of unmeritorious claims is not very valid if we talk about third-party funding by the main litigation funders. After all, in order to obtain funding, the cases go through rigorous review by the third-party funders and cases without merit are not likely to be funded. I believe the challenges with third-party funding are mostly related to the added layer of complexity that an additional player brings to the arbitration scenario when considering, for example, conflicts and costs. Third-party funding also turns the litigation/arbitration industry into more of a business and provides parties with flexibility in terms of funding. The third-party funders are experts in assessing claims and managing costs for large proceedings – something users of arbitration may well appreciate.

Lars Markert: I tend to agree that third-party funding will continue to grow in international arbitration, although probably at different speeds in different regions. It is remarkable that this is another area in which Hong Kong and Singapore seem to be racing each other – this time towards allowing third-party funding. On the German market, growth seems to be rather slow and somewhat focused on the area of investment arbitration. This may be due to the fact that third-party funding is not part of the German litigation tradition and funders do not seem to “work the market” as actively as maybe in other jurisdictions. Having been involved in one third-party funded investment arbitration with Gleiss Lutz, I would disagree with the notion that third-party funding increases unmeritorious claims. Funders are interested in recovering their investment and therefore carefully scrutinise a claim’s chances of success. The resulting claim-vetting by an independent third party might thus rather be considered an advantage, just like the fact that third-party funding can sometimes be the only way for an impecunious party to raise meritorious claims. Disadvantages can arise if there are no safeguards (such as, for example, after-the-event insurance or security for costs) for ensuring that a winning party can recover its costs against the funded party. Not a disadvantage, but certainly a challenge will be conflicts of interests between third-party funders, counsel and arbitrators. This raises the question of whether conflict, or at least the perception of conflict, can be overcome by broad disclosure requirements and how such disclosure would at times be reconcilable with the principle of confidentiality applying to most commercial arbitration proceedings.

Roland Ziadé: In case of financial difficulty, or when confronted with a much wealthier opponent which can exert financial pressure by prolonging the dispute, third-party funding (TPF) may be the only means for a party to have access to arbitration proceedings.  

While TPF may possibly result in the funding of some unmeritorious claims, given that third-party funders ordinarily take a risk when financing a claim, they normally carry out claim assessments beforehand. TPF can therefore also act as a “filter” between meritorious (or, at least, credible) claims and abusive ones.

One of the disadvantages of TPF is that the funded party may lose full control over the case, with the funder exerting pressure on the funded party (although some of the professional third-party funders have a policy of taking a hands-off approach). TPF may also have implications with respect to issues of privilege and confidentiality as well as conflict of interests. Furthermore, in light of the trend toward greater transparency (especially in investment arbitration), the issue of whether to disclose the existence of TPF and the funder’s identity has become significant.

In light of the above, the use of TPF may continue to rise but it will likely occur within a better defined framework. For example, disclosure is likely to become mandatory (indeed, 76 per cent of the arbitration practitioners surveyed in the latest Queen Mary survey believe that disclosure of the existence of TPF in an arbitration case should be mandatory, and the revised IBA Guidelines on Conflicts of Interest in International Arbitration already reflect these views). Furthermore, the local courts may have a more favourable approach to TPF in the future, in particular with respect to the recovery of TPF costs (for example, the English High Court confirmed in September this year that TPF costs were recoverable in addition to the award of costs and damages).

A number of jurisdictions which are historically considered challenging forums for arbitration have reformed their arbitration legislation in 2015, with jurisdictions such as Brazil, Russia, Bahrain and India adopting new legislation. Is the impact of such reforms being felt globally in the arbitration legal market yet, and if so, in what way? If not, what do you anticipate such impact to be in the future?

Anna-Maria Tamminen: I believe this is part of a larger trend in regions understanding that in order to be able to attract international arbitration business, they need to provide the internationally accepted protections in their law. It certainly assists companies from such regions in insisting on seating the arbitrations closer to home. I do believe, however, that the change of the arbitration legislation is only the starting point. It is the practice of how the law is applied that ultimately makes the difference and assists a country in developing a reputation as a reliable arbitral seat. I strongly believe, for example, that the continued success of Switzerland, the UK and Sweden as arbitral seats is partly due to the support the courts provide to, and in relation to, arbitration. Singapore is a great example of a seat that has grown tremendously in importance by not only being at the forefront of legislative developments, but also by having its courts support the arbitral process effectively.

Lars Markert: It may be too early to feel a global impact, particularly as some of the reforms only entered into force during 2016. It will take a while until the new legislation can be tested in practice and reported on by arbitration experts in those jurisdictions. In the long run, the reforms will most likely increase the attractiveness of jurisdictions such as Brazil, Russia and India, particularly as they are extremely relevant from an economic perspective. It has to be kept in mind, however, that a progressive national arbitration law is only one important aspect. Ultimately, what matters is the application of the law by the national judiciary and so far not all of these countries have a particularly efficient or arbitration-friendly track record. Thus, in a first instance the reforms will be mainly an important sign that the relevance of international arbitration has been recognised and taken into account. This in itself may have a positive impact on the investment climate. However, following the motto “actions speak louder than words”, time and practical experience will have to tell whether the image of Brazil, Russia, Bahrain and India will change from “challenging” to “challengers” of the established arbitral jurisdictions.

Roland Ziadé: A number of jurisdictions have recently modernised their arbitration law. Although it is difficult to provide general comments as some of these arbitration laws are more arbitration-friendly and progressive than others, the changes all tend to foster a more favourable approach to arbitration with less interference from the domestic courts. As such, these modernised arbitration laws provide greater international legal certainty and contribute to a more harmonised and pro-arbitration approach world-wide.

However, there has not really been a significant impact yet on the global market. In particular, some of these new laws still contain provisions which would prevent the relevant jurisdictions from taking an important role in the arbitration legal market. For example, the new Russian arbitration law still poses some difficulties with regard to the arbitrability of corporate disputes (a number of disputes still remain non-arbitrable and some corporate disputes can only be arbitrated if the place of arbitration is within the territory of Russia) and the impact of a registration requirement on arbitral institutions has yet to be determined.

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