BY: LILIAN AMENAWON ITUA (LL. B, B. L., ACArb.)
Introduction
There is no simple answer as to whether Arbitration is cheaper than litigation.[1] In Arbitration, costs essentially stems from five sources: Arbitral Institutions, Arbitrators, Experts, Legal Counsel and The Arbitration Process itself. Although resolving a domestic, commercial dispute is costly, the expenses involved with resolving international commercial disputes are even higher.[2]
Arbitrations are regarded as International by UNCITRAL (the United Nations Commission for International Trade Law) in the Model Law on International Commercial Arbitration if:
a. The parties to an Arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different States; or
b. One of the following places is situated outside the State in which the parties have their places of business:
- The place of Arbitration is determined in, or pursuant to, the Arbitration agreement.
- Any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject matter of the dispute is most closely connected; or
c. The parties have expressly agreed that the subject matter of the Arbitration agreement relates to more than one country.[3]
Parties to disputes extending across national boundaries often need to hire counsel in more than one country, spend additional travel time, pay for translator and interpreter services, and incur other general expenses. These expenses tend to add up quickly. In some cases, they become so substantial that they overshadow the substance of the dispute.[4]
Party autonomy in Arbitration means that parties are the masters of the Arbitration process. They can determine and agree on virtually all the steps taken from the commencement to the conclusion of the arbitral proceedings. If utilised effectively, party autonomy can be a powerful tool for controlling the costs in arbitral proceedings.[5]
Cost Control at Contract Formation Stage
Where parties choose international Arbitration, they begin with an Arbitration clause. A clause that clearly sets forth the basics (agreement to arbitrate, applicable rules, number of arbitrators, seat of Arbitration and governing law) helps prevent eventual unnecessary disputes over ambiguous or inaccurate language.[6]
A well-drafted Arbitration agreement or clause will help avoid preliminary arguments such as whether a dispute is subject to Arbitration. In most arbitral proceedings, disputes as to the scope of the Arbitration agreement clause are ordinarily determined first, which tends to add to the length and cost of the Arbitration substantially.
Understanding the key factors that underlie cost control in an Arbitration clause is important.
They include the following:
1. The type of Arbitration: Ad-hoc Arbitration or Institutional Arbitration?
From the outset, the parties should decide the type of Arbitration that suits their financial capabilities, whether the Ad Hoc (non-administered) Arbitration or an Iinstitutional (administered) Arbitration. [7]
In the latter, proceedings are managed by an established institution pursuant to that institution’s pre-existent rules of procedure.[8] These institutions assist in the administrative aspects of the Arbitration, such as organising hearings, handling communication between the parties and the arbitrators, scrutinizing awards and handling payments. However, they do not decide on the dispute’s merits, and this is left entirely to the arbitral tribunal.[9]
Numerous institutions assist in running the Arbitration in exchange for a fee. Each arbitral institution has its fee structure. While some institutions charge based on the amount in dispute, others charge on a flat hourly rate. These expenses are incurred in addition to arbitrators’ fees and costs, logistical expenses of the proceedings, and costs of assisting tribunals (including fees for tribunal secretaries and registrar).[10] The claimant in a dispute must also pay a significant fee to initiate the Arbitration procedure. This fee is known as registration or filing fee.
When selecting an institution, Parties must consider the benefits of each institution and how administrative costs may change during the life of the Arbitration. Parties are encouraged to compare the costs of the various institutions beforehand.[11]
An Ad Hoc Arbitration, on the other hand, is not organised under the supervision of an institution. The parties will therefore have to determine all aspects of the Arbitration themselves. An adequately structured ad hoc Arbitration should be more cost-effective, provided cooperation between the parties approaches the Arbitration. The absence of administrative fees alone provides an excellent incentive to use the ad hoc procedure in international commercial disputes.[12]
Institutional and Ad Hoc Arbitration both have their perceived advantages and disadvantages. Therefore, before selecting either ad hoc proceedings or institutional Arbitration, the key is to evaluate the best procedure that will achieve parties’ legal and business objectives at the time of drafting the Arbitration clause.
2. The Number of Arbitrators: Three or One Arbitrator?
Arbitrations are typically conducted by either one or three arbitrator(s), referred to in each case as the “tribunal”. The tribunal is the equivalent of a judge (or panel of judges) in a court action. Arbitrators in international cases are usually very experienced lawyers and/or experts in the dispute’s field. A strong Arbitration clause must provide the number of arbitrators and the selection process. International arbitrators’ selection, fees and expenses can comprise a considerable portion of Arbitration costs.[13] The most crucial factor is whether to appoint one or three arbitrators.
Although parties may desire the certainty of appointing either a One or a Three-person tribunal in their Arbitration agreement, consideration should be given to the nature of the dispute case.[14] The experience and availability of an arbitrator should also be considered. Experienced arbitrators, who recognize that they have a duty to ensure the expeditious and economical determination of the dispute and a duty to ensure a fair process, can ensure that Arbitration is conducted efficiently.[15]
Regulating Cost in Arbitral Proceedings
Time is money in Arbitration. Suppose the overall cost of the arbitral proceeding is to be minimized. In that case, special emphasis needs to be placed on parties’ presentation of their cases.[16] The increasing and, on occasion, unnecessary complication of the arbitral proceedings is the primary explanation for the long duration and high cost of many international Arbitrations.[17] The longer the proceedings, the more expensive they will be. Techniques for controlling time and costs in Arbitration are designed to assist arbitral tribunals, parties, and counsel. These techniques guide the efficient management of the proceedings.
The following areas in which cost can be reduced in international Arbitration proceedings are:
1. Evidence Production
Oral or Documentary Evidence Production
It is imperative to note that oral presentation of issues will save cost in international Arbitration.
Even though the use of documents-only procedures is not that common in international Arbitrations, as a preliminary matter, parties should consider whether it is entirely necessary to have an oral hearing from start to finish and whether certain aspects of the dispute can be determined based on the documents produced by the parties. This shortens the process and has huge savings on costs since the parties do not incur the high costs of representations. Additionally, the fees to be paid to the arbitrator will reduce due to the elimination of the hearing time and the costs of hiring the hearing venue.
Under Nigerian Arbitration and Conciliation Act (ACA), Section 19 (1)(2) makes provisions concerning points of claim and defence.
Parties are at liberty to submit most of the things they are going to rely on during the hearing to the arbitral tribunal. This affords an opportunity for the arbitrators to scrutinize all those documents and select the ones that are necessary, thus saving time and cost in the arbitral process. Although document production costs can spiral out of control, it is imperative that parties produce only those documents that are material to the dispute rather than all documents that are relevant to the dispute.[18]
2. The Hearing
Use of Expert:
As the complexity and size of international Arbitrations have increased, so has the amount of money that parties expend to retain experts. Parties are also responsible for reimbursing reasonable expenses incurred by the experts, such as any travel and accommodation costs required to prepare the expert reports or testifying at the Arbitration hearings.To lower costs, parties engaged in Arbitration should ascertain the areas that truly require expert testimony and either agree with the opposing party on limiting expert testimony or get the arbitrators to limit expert testimony.[19] This minimizes the extent of work performed by the experts and can often lead to significant cost savings and should be employed whenever possible.
Witnesses:
In international Arbitration,parties need to bear the costs entailed in witness preparation, travel and accommodation. To reduce witness-related expenses, parties need to limit the number of witnesses.
Legal Service:
Clients should actively compare the value of the legal services being offered by multiple law firms prior to retaining Arbitration legal counsel. They should also insist that a maximum cap on legal fees be in place prior to formally engaging legal representation, which will allow the client to know the true cost of international Arbitration that he or she will be paying in advance.[20]
The choice of legal counsel is also vital if a party keeps the costs and length of the Arbitration down.[21] An experienced international Arbitration lawyer will know how to anticipate and prevent costs from spiralling out of control.[22]
Venue of Hearing:
The highest logistical cost usually is the venue of the hearings (or juridical seat). In international Arbitration, hearings can be held anywhere in the world, regardless of the legal seat of Arbitration. The most convenient place for all parties should be selected to minimize costs.
Pre-Hearing Meetings:
Hearings are expensive and time-consuming. Suppose the length and number of hearings requiring the physical attendance of the arbitral tribunal and the parties are minimized. In that case, this will significantly reduce the cost of the proceedings.
The use of pre-hearing meetings is significant because it serves as an avenue for the parties in dispute to simplify the issues to be determined, fix hearing dates, and identify the proposed witnesses for each that may be necessary or advisable.[23] Parties can also agree on a time frame for the hearing and rendering of the arbitral award.
In the pre-hearing meeting, parties ought to consider how technology can assist them throughout the proceeding. International Arbitration affords parties the flexibility to use technology in myriad ways in the proceedings. [24]
Consideration can be given to the use of video and telephone conferences for client meetings, procedural and other hearings where attendance in person is not essential, as well as the use of electronic document production versus paper production.[25]
Technology in International Arbitration should be used in a manner to make proceedings more efficient and cost-effective, considering the nature and complexity of the dispute.[26]
Conclusion
International Arbitration has come to stay, and its steady growth and acceptability can be taken as given. Shaping the Arbitral Proceedings so that the duration and cost of the Arbitration are commensurate with what is at stake in the case and appropriate in light of the claims and issues presented is therefore very necessary.
Hence, wherever possible, the parties and the arbitral tribunal should make a conscious and deliberate choice early in the proceeding as to the specific procedures and techniques suitable for their case to reduce cost. The arbitral tribunal should work proactively with the parties to ensure that international Arbitration proceeding is conducted in a cost-effective and efficient manner.
[1] Raphael Ng’etich, ‘The Current Trend of Costs in Arbitration: Implications on Access to Justice and the Attractiveness of Arbitration’ (2020) 5(2) Alternative Dispute Resolution 111.
[2] Ali Assareh, ‘Forum Shopping and the Cost of Access to Justice: Cost and Certainty in International Commercial Litigation and Arbitration’ (2013) 31 Journal of Law & Commerce 1, 5.
[3] United Nations Commission for International Trade Law Model Law on International Commercial Arbitration (adopted 21 June 1985, amended 7 July 2006) art 1(3).
[4] Assareh (n1).
[5] Noella Lubano and Eva Mukami, ‘Worth Your While?: Cost Effectiveness of International Arbitration’
(Oraro & Company Advocates, 12 December 2018) <https://www.oraro.co.ke/2018/12/12/worth-your-while-cost-effectiveness-of-international-Arbitration/> accessed 20 September 2021.
[6] Latham & Watkins, ‘Guide to International Arbitration’ (LW, 2017) <https://www.lw.com/thoughtLeadership/guide-to-international-Arbitration-2017> accessed 19 September 2021.
[7] International Bar Association Guidelines for Drafting International Arbitration Clauses (adopted 7 October 2010) (IBA Arbitration Clause Guidelines) Guideline 3.
[8] Ken MacDonald and Ryan Openshaw, ‘Demystifying International Arbitration-The importance of the Arbitration clause’ (Brodies, 6 May 2021) <https://brodies.com/insights/international-Arbitration/demystifying-international-Arbitration-the-importance-of-the-Arbitration-clause/> accessed 23 September 2021.
[9] Nikita Varedvu, ‘The Concept of Institutional Arbitration-Need for the Hour’ (Legal Desire, 25 March 2018) < https://legaldesire.com/concept-institutional-Arbitration-need-hour/> accessed 23 September 2021.
[10] Claudia Salomon and Shreya Ramesh, ‘A Primer on International Arbitration Costs’ (Bloomberg Law, 30 September 2019) <https://www.lw.com/thoughtLeadership/byline-primer-international-Arbitration-costs> accessed 27 September 2021.
[11] Daniel González, Maria Carmona and Roland Potts, ‘Controlling the Rising Cost of Arbitration’ Financier Worldwide Magazine (United States, October 2014) < https://www.financierworldwide.com/controlling-the-rising-costs-of-Arbitration#.YW6pihDMKQv> accessed 1 October 2021.
[12] Pinsent Masons, ‘Institutional vs. ‘ad hoc’ Arbitration’ (Out-Law Guide, 12 August 2011)
< https://www.pinsentmasons.com/out-law/guides/institutional-vs-ad-hoc-Arbitration> accessed 26 September 2021.
[13] Joseph Profaizer, ‘International Arbitration: Now Getting Longer and More Costly’ [2008] The National Law Journal <https://webstorage.paulhastings.com/Documents/PDFs/9833309df6923346428811cff00004cbded.pdf> accessed 17 September 2021.
[14] ICC Arbitration Commission, ‘Techniques for Controlling Time and Costs in Arbitration’ (Iccwbo.org, 2007) < https://library.iccwbo.org/content/dr/COMMISSION_REPORTS/CR_0033.htm#TOC_BKL1_1> accessed 20 September 2021.
[15] Chartered Institute of Arbitrators Singapore, ‘Ten Tips for Saving Time and Cost in International Arbitration’ (Ciarb.org, 5 September 2014) < https://www.ciarb.org.sg/ten-tips-saving-time-cost-international-Arbitration/> accessed 15 September 2021.
[16] Temitayo Bello, ‘Arbitration as an Alternative to Litigation Malady: The Frontiers of How to Save Time and Costs in Arbitration’ (SSRN, 20 February 2019) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3338499> accessed 1 October 2021.
[17] Leon Trakman and Hugh Montgomery, ‘The Judicialization’ of International Commercial Arbitration: Pitfall or Virtue?’ (2017) 30 Leiden Journal of International Law 405.
[18]Aceris Law, ‘Minimizing the Cost of International Arbitration’ (Lawyersnjurists) <<https://www.lawyersnjurists.com/article/minimizing-the-cost-of-international-Arbitration/> accessed 17 September 2021.
[19] Techniques for Controlling Time and Costs in Arbitration (n18).
[20] Aceris Law (n23).
[21] Michael Buhler, ‘Cost of Arbitration: Some Further Consideration’ (2005) Global Reflections on International Law, Commerce and Dispute Resolution
[22] Daniel González, Maria Carmona and Roland Potts (n11).
[23] Bello Temitayo, ‘Arbitration as an Alternative to Litigation Malady: The Frontiers of How Arbitrators Saves Time’ (2014) 2 Arabian Journal of Business and Management Review 2.
[24] Mccarthy Tetrault, ‘Going virtual-The Use of Technology in International Arbitration’ (Mccarthy.ca, 27 May 2020) < https://www.mccarthy.ca/en/insights/blogs/international-Arbitration-blog/going-virtual-use-technology-international-Arbitration> accessed 2 October 2021.
[25] Don Hayden, ‘Controlling Costs in Arbitration’ (Markmigdal.com, 27August 2017)
< https://www.markmigdal.com/controlling-costs-in-Arbitration/> accessed 2 October 2021.
[26] Daniel Gonzalez and others, ‘Protocol for the Use of Technology in International Arbitration Hearings’ (Lexology, 11 February 2021) < https://www.lexology.com/library/detail.aspx?g=df16aa65-d07a-4969-8eb5-f5632f1ae676> accessed 29 September 2021.
