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Join GAR for launch of Prague Rules this Friday

10 December 2018

Join GAR for launch of Prague Rules this Friday

Prague (Credit: iStock.com/Deejpilot)

This Friday, GAR will help to launch the Prague Rules at an event in the Czech capital. Tickets are still available for the event, which will include the signing of the rules and a commemorative photo of all attendees.

If you are unfamiliar with the Prague Rules, or simply unsure if they're a good idea, this article by Vladimir Khvalei may help.  In it, Khvalei, partner at Baker & McKenzie, immediate vice-president of the ICC Court and a member of the group behind the Prague Rules, explains their origins, the niche they fill, and why they're not in fact a threat to the IBA rules or indeed international arbitration.

In recent times the draft Prague Rules on the Efficient Conduct of Proceedings in International Arbitration have been hotly debated in venues around the world. While the number of supporters is growing, it is impossible to ignore the criticism of the rules, which have been described by some opponents as regressive and dangerous, even as a “little monster”. 

This criticism comes from lack of understanding as to why the rules were felt necessary and how they can be applied.

Why are the Prague rules needed?

Despite the tendency towards globalisation, the world is, unfortunately, a long way from universal and uniform regulation including in the field of international arbitration.

While the International Bar Association carried out an impressive task in creating a compromise between common law and civil law approaches in its IBA Rules on the Taking of Evidence in International Arbitration, these are still considered in many common law countries to be too close to the civil law model of proceedings, while many practitioners in civil law countries believe that they are mainly based on common law concepts.

In particular, civil law practitioners are concerned by the almost unlimited right of the parties to call witnesses of fact and experts and the assumption of other features of common law proceedings such as written witness statements, cross-examination and document production.

While the use of these procedures rooted in the common law may be fully justified in the event of disputes between companies from different legal traditions, why should two disputing companies from civil law countries be expected to use them in the same way? To expect them to do so seems especially strange if neither the companies nor their representatives are familiar with the procedures or know how to apply them. 

Whether people like it or not, the reality is that most of the geographic world is made up of countries with civil law-based legal systems.

 

As a result, a significant number of international trade disputes arise between companies that are from civil law countries.

We can see this plainly from research carried out by the Russian Arbitration Association (RAA) in 2018, looking at 472 foreign arbitral awards that were presented to Russian courts for recognition and enforcement over a 10-year period, from 2008 to 2017. The cases generating these awards involved parties from nearly 50 countries, with the vast majority being from Russia’s neighbour states, Ukraine and Belarus. Only a small fraction of the cases involved parties from common law countries.

 

Of course the proportion would not be the same were we to look at cases heard or awards submitted for enforcement in other major civil law countries, such as Germany, France and China. However, one conclusion is indisputable: the number of disputes between companies from civil law countries is significant and sufficient to justify developing rules of evidence based on a traditional civil law model only.

The Prague rules

In essence, the Prague rules adapt the inquisitorial model of civil law court proceedings to arbitration, giving tribunals an active role in establishing the facts and managing the procedure. For example, the tribunal has authority to request evidence of its own initiative, appoint an expert to conduct examination at its own initiative, appoint a tribunal expert and decide which witnesses are to be called for examination during the hearing.

The tribunal is further entitled to take an active role in determining the rules of law applicable to the dispute (iura novit curia), of course taking into account that it is an international arbitration rather than a litigation.

And it can ensure the early determination of issues in the case; freely share with all parties its preliminary views with regard to the burden of proof, the relief sought, the disputed issues and the weight and relevance of evidence submitted; and intervene to facilitate an amicable settlement without the risk of being disqualified.

Finally, the civil procedural model restricts document production, including and especially electronic document production. A party may still request a particular document or documents that it can identify to the tribunal but there is no room for the extensive and sometimes speculative requests for document production seen in the common law model of proceedings.

Misconceptions about the Prague rules

In their short lifetime, a number of misconceptions have arisen about the Prague rules, mainly caused by a lack of understanding of their purpose. Here are the 10 most popular.

Misconception 1. The Prague rules are a Russian product.

This misconception rests on the belief that everything that comes from Russia is bad and potentially dangerous.

Leaving aside the interesting question of whether such a generalisation is justified, it is worth noting that the Prague rules were not a "Russian" initiative. They were created by a group of arbitration practitioners from more than 30 countries from around the world, with many more added to the group since. 

Misconception 2. The Prague rules are no different from the IBA rules.

Some colleagues apparently believe that the Prague rules are not substantially different from the IBA rules. Indeed, the IBA rules also call for an active role on the part of the tribunal, allow the number of witness statements to be limited, permit the possibility of tribunal-appointed experts (or at least don't exclude it) and authorise the tribunal to efficiently manage the hearing.

However, the scope of the Prague rules is much broader: they are not only about evidence but also about managing the conduct of the arbitration. 

Further, as explained above, there is a substantial difference in the approach to evidential issues under the IBA rules and the Prague rules.

In particular, the Prague rules exclude production of "categories of documents", even if they are "narrow and specific", stating that only "a document" or "documents" should be submitted.

They also change the procedure for producing the documents: the party requesting them has to directly approach the tribunal, without any prior exchange of communications between the parties about what they seek or any Redfern Schedule.

Furthermore, the Prague rules do not allow the parties to produce an unlimited number of witnesses, stating that they may only be called with the permission of the tribunal. As a rule, witness statements are not to be used. And where expert reports have been submitted, preference is given to the report of the tribunal-appointed expert.

Misconception 3. The Prague rules are not needed, as the IBA rules allow the same things to be done.

Yes. This is correct. In theory, tribunals can do everything which the Prague rules envisage where the parties agree to the application of the IBA rules, as the IBA rules are flexible enough to allow it.

I could go further. Tribunals can do all these things even without applying the IBA rules, because, as the UNCITRAL Model Law makes clear, in situations where parties have not agreed on the procedure of the arbitration, the tribunal is free to conduct the case in such manner as it considers appropriate.

However, as a matter of practice, tribunals very often abstain from the active management of proceedings. For example, the terms of reference in the ICC arbitration rules require the preparation of a list of issues, which should be identified by the tribunal at the case management conference.

This provision was intended to "force" tribunals to review and analyse the parties' positions and crystallise the disputed issues at an early stage of proceedings. Unfortunately, in the majority of cases, the tribunals do not do it, excusing themselves on the basis that it is too premature to establish the issues in dispute.

The real reasons for their failure, however, are different.

First, many arbitrators appointed to hear cases are overloaded: they handle more cases than they can efficiently manage. Despite the efforts made by institutions in recent years to broaden the pool of arbitrators, it is taking years to pour new blood into the system. Today, unfortunately, it is not uncommon for arbitrators to come to case-management conferences without even having opened the boxes of documents submitted by the parties. As a result, they tend to use the "standard" drafts of the terms of reference and model procedural orders such as procedural order number 1, which they have used in dozens of other cases.

This problem, of course, will not be resolved by using the Prague rules. Overloaded arbitrators will remain overloaded and reactive, simply because they do not have time to review the case file and to be proactive. 

The second reason for such behaviour on the part of arbitrators is that some think that it is inappropriate to actively manage the proceedings because it would interfere with the principle of party autonomy or give rise to concern that they may be biased.

This problem can be cured by the Prague rules. Indeed, the rules send a message to the international arbitration community that there is a different way of conducting arbitration proceedings and that it is not inappropriate for arbitrators to express an early view on disputed issues, burden of proof and evidence, especially when the parties agree that this is what they expect.

Misconception 4. The Prague rules will prevent the arbitration community from developing a "one size fits all" standard

One of the most popular misconceptions about international arbitration voiced at conferences is that the IBA Rules have become a universal standard for the conduct of cases. However, this is far from the reality.

In the world of "luxury arbitration" – comprising the bulk of cases under the rules of the ICC and LCIA, with a large amount of money at stake and representation by top law firms  the claim may have some truth.

However, a much larger segment of arbitration work worldwide falls outside the "luxury" world – as is again shown by the RAA study regarding Russian enforcement cases in the past 10 years.

One might be surprised to know that the majority of Russian enforcement cases come not from the ICC, the LCIA or SCC, but from arbitration courts at the Ukrainian and Belarusian Chambers of Commerce. If one were to ask how often the IBA rules are used in these arbitrations, the answer would be "never". The proceedings are instead conducted in line with the principles common to the region, which are now embodied in the Prague rules.

Thus, the Prague rules are not intended to prevent the users of the arbitration from achieving a "one size fits all" standard or to distract them from that goal. They are intended to fill a niche which has not been filled by the IBA rules.  

Misconception 5. The Prague rules are intended to replace the IBA rules.

There is no need to replace the IBA rules. The rules are and will remain a good instrument to assist parties in international arbitration, especially (as their foreword acknowledges) those coming “from different legal cultures”.

The Prague rules are not intended to replace the IBA rules but to supplement them: to provide users of international arbitration with one more option. If you live on the same bank of the river as a friend, there will be no need for you to use a bridge – but if there comes a time when you wish to cross to the other side, that bridge will suddenly be of great help. 

Moreover, the Prague rules can be used together with the IBA rules, with the parties picking and choosing from the two sets of rules and procedures that are most appropriate  to build their ideal process, much like children choosing LEGO blocks.

Misconception 6. The Prague rules are inconsistent with the basic principle of party autonomy that is key to arbitration.

Some opponents of the Prague rules say that the inquisitorial approach is not consistent with the basic principle of party autonomy underpinning international arbitration and that, if the parties want the tribunal to set the procedure like a judge, they should go to a state court.

This is a rather unusual understanding of the principle of party autonomy. In fact, if the parties want to have a dummy as an arbitrator, they should be able to have one. If they want a judge, they should be able to have one too. And if they want an arbitrator who will decide a dispute by the mere toss of a coin, they should be entitled to such "coin arbitration".

Giving the parties to arbitration more options, including the option to select the Prague rules, is more in line with the principle of party autonomy than denying the parties such a choice. At the moment, it is interesting to note that the ICCA Drafting Sourcebook for Logistical Matters in Procedural Orders provides four options for choosing the procedure in international arbitration, all four of which make reference to the IBA Rules. The existence of the Prague rules widens parties' choice and thus contributes to party autonomy rather than derogating from it.

Misconception 7. The Prague rules create a risk that awards will be challenged or refused enforcement.

This misconception is linked to the so-called due process paranoia of many arbitrators, a phenomenon worth its own research. However, like any other paranoia, it has little to do with reality.

How many cases can you actually recall where the arbitral award was set aside because the tribunal restricted a number of witnesses and limited the length of cross-examination? Or did not allow extensive document production? Or put more weight on the report of the tribunal-appointed expert than that of the the party-appointed expert?

Admittedly, there are cases where awards have been set aside or refused enforcement because a party was not properly notified about the proceeding or the hearing. But it would be a challenge to come up with more than a very few exceptional cases, if any at all, where the award was set aside because the tribunal conducted the proceedings in a manner that differed from the parties expectations.

The real reason for "due process paranoia" is that arbitrators want to be nice to the parties and their counsel and are are afraid that, if they are not nice enough, they will not receive future appointments. Thus, the "due process paranoia" is in fact a "please appoint me again, because I am nice" paranoia.

But where is there room for this paranoia if the parties agree to apply the Prague rules? How can the parties challenge the award of a tribunal that merely applied the procedural principles they said they wanted?

Where this has happened, I would argue that the problem simply evaporates.

Misconception 8. The limitations of procedure in the Prague rules are too severe for them to be used in practice.

Some have said, "I am not prepared to go to arbitration without even the possibility of document production, written witness statements and cross-examination of witnesses or experts."

And they are right. If the amount at stake is so significant that the parties are prepared to spend significant funds on an arbitration involving all of these things, where is the problem? Do not use the Prague rules. Use the IBA rules or any other procedural rules.

But have a look again at the statistics produced by the RAA.The graphics below demonstrate not only the rate of enforcement of foreign awards, but also the amount of the awards and the type of disputes that generated them.

 

What follows from these graphics is that the vast majority of cases are disputes arising out of sales contracts with the amount awarded being less than €1 million. 

For such low value and straightforward disputes, where parties are probably prepared to pay their lawyers a maximum of €50,000 for the whole case, is it really feasible to have proceedings with document production, with written witness statements and with cross-examination?

Arguably it is not, and, in such cases, counsel would most likely insist on the application of the Prague rules to squeeze proceedings into the approved budget.

Some will no doubt argue that that such low-value cases should go to mediation instead of arbitration. The same could be said of high-value cases. But this would essentially amount to denying small businesses access to arbitration in international dealings because their transactions and disputes are too small. So the question arises: which is better for international trade – to have a quick and efficient arbitrator, even one who sometimes acts like a judge, or for claims to be abandoned and forgotten because they are too small and businesses cannot afford the costs of arbitration? 

Misconception 9. Early expression of views on disputed issues means tribunals pre-judge issues against the interests of the parties.

Provisions of the Prague rules enabling tribunals to express an early view on issues in their cases have provoked a lot of criticism. Opponents say that such provisions create a risk of prejudgment as arbitrators are encouraged to take a position on disputes without hearing all the parties’ arguments.

First, it should be noted that it is human nature for an arbitrator to takes a position on a case after reading the request for arbitration and the respondent's answer. This position may be preliminary only and not strong, but the arbitrator has nevertheless taken it. He or she cannot read submissions without having thoughts on them. 

So the only difference created by the Prague rules is that the arbitrator is able to share that preliminary position with the parties. Not sharing the position does not mean that it does not exist. 

At the same time, sharing preliminary views with parties has a number of advantages. 

First, the parties can see whether or not the tribunal has understood their respective cases and are able to concentrate in their subsequent submissions on the issues that are really important to them, omitting evidence on issues which are already clear to the tribunal.

Second, the parties can get a sense of the extent to which the tribunal is or is not “buying” their arguments, enabling them to choose to settle the dispute rather than waste more time and resources on years of arbitration.

If you were to ask in-house lawyers whether they would prefer to know that they are likely to lose a case early or late in proceedings, nine out of 10 would say early so that they have the chance to settle. If you put the same questions to law firms, the answer would most likely be different.

Misconception 10. Arbitrators should not act as mediators.

The Prague rules not only give tribunal members the right to to act as mediators, but encourage them to do so. Again, some opponents of the rules say this is inappropriate, as during mediation the arbitrators may get to know the real position of the parties, meaning they cannot continue as a neutral tribunal if the mediation fails.

In response, it must be noted that the rules say that the tribunal should continue its arbitration function after mediation has failed only with the written agreement of the parties – meaning that they accept the risks involved.

It must further be noted that if the parties do not agree that the arbitrators should continue their function, the tribunal (or whichever member of it took on the role of mediator) will need replacement, causing a delay in the resolution of the dispute.

If the parties agree that mediation should happen despite this risk, it is likely that they believe there is a good chance it will result in the settlement of the case. It is unlikely parties would seek mediation simply to secure a change of tribunal with no guarantee that that the replacement tribunal would reach different views on the case.

Finally, one should not forget that in some parts of the world, parties expect arbitrators to double up as mediators. Indeed, in traditional Islamic legal culture, arbitration is a mixture of mediation, conciliation and arbitration; and in Asia, many practitioners support the idea of arbitrators assisting the parties in reaching settlement in a process known as med-arb.  

Diversity calls... 

To conclude, arbitration is about party autonomy and diversity – not just the gender and race diversity of which much is written but the diversity of legal cultures around the world. Arbitration provides scope for this diversity – although it seems it is taking time for people to realise and embrace this.

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