Current Challenges in US and International Arbitration
Current Challenges in US and International Arbitration
International arbitration today faces a growing list of challenges, most of which arise from the success of the process itself. Because international arbitration has proven to be an efficient and effective means to resolve international disputes, including the enforcement of awards, it has become standard to include arbitration clauses in any significant international transaction. In addition, the proliferation of bilateral investment treaties, the success of some investors in winning substantial claims under those treaties, and the changing economic environment worldwide have caused a boom in investment treaty arbitrations. A recent survey found approximately 50 current contract and treaty arbitrations raising claims of at least US$1 billion. The complexity of such cases and their size have led to more extenuated proceedings, longer hearings and mountainous written submissions.
The goals of international arbitration have not changed. They can be summarised as: (i) a fair and neutral process, (ii) conducted by intelligent and experienced arbitrators, (iii) resulting in a timely and well-reasoned decision, and (iv) benefiting from an effective enforcement mechanism.
To achieve these goals in light of current developments, we need to return to basics. In economics, there is an effective tool known as zero-based budgeting, in which one does not start with the prior year's budget, but instead builds from scratch to identify only what expenses are necessary for the coming year. The arbitration community should adopt the same approach to international arbitration procedure. While we can all build on experience from procedures developed in prior cases, at the beginning of each new case the parties and arbitrators should focus on exactly what is necessary — and only what is necessary — for that specific case. Is discovery necessary? Witness statements? Any oral testimony? Extensive memorials?
In recent years, arbitrators and practitioners have developed a wide range of techniques to conduct international arbitration in a more efficient manner. This article will discuss important procedural issues and the manner in which arbitrators are working with each of them to make the international arbitration process more efficient and effective. The article will then describe an important, recent US Supreme Court case and the effect that it may have on judicial review of arbitral awards in the United States.
Significant trends in international arbitration procedures
Preliminary dispositive issues
International arbitrations generally do not contemplate the scope of motion practice that exists in American litigation. One disadvantage of international arbitration is that issues that may be dispositive of a case and appropriate for a motion to dismiss or summary judgment in court litigation may often be considered by arbitrators only after a full evidentiary hearing on all of the issues. In such cases, international arbitration may in fact take longer than domestic US litigation that could potentially be concluded on a summary basis.
Some arbitrators have begun to use recent changes to international arbitration rules to ameliorate this problem. The intent of these rules is not to permit broad or unnecessary motion practice, but rather to provide the opportunity to dispose of cases at an earlier stage when it may be appropriate and possible to do so. For example, the IBA Rules of Evidence encourage each arbitral tribunal to identify to the parties, as early as possible, 'the issues that it may regard as relevant and material to the outcome of the case, including issues where a preliminary determination may be appropriate'. The AAA International Arbitration Rules are even more explicit:
The Tribunal may in its discretion direct the order of proof, bifurcate proceedings, exclude cumulative or irrelevant testimony or other evidence, and direct to the parties to focus their presentations on issues the decision of which could dispose of all or part of the case.
The LCIA Rules give arbitrators the power to 'take the initiative in identifying the issues and ascertaining the relevant facts and the applicable law(s) or rules of law', and they also reflect the general duties for arbitrators set forth in the English Arbitration Act 'to adopt procedures suitable to the circumstances of the arbitration, avoiding unnecessary delay or expense'.
Such motions should not be overused in international arbitration. Arbitrators generally will not be pleased with a litigation-style, all-out approach. Nevertheless, when an issue may dispose of all or part of a case, such as a time limitation, the validity of a release, the application of res judicata or collateral estoppel or the application of law to undisputed facts, a party should seek to have arbitrators consider the issue at an early stage in the name of efficiency. Parties should not have to present all of the evidence on all of the issues only to have the arbitrators decide the case on an issue that could have been decided early, with much more limited evidence.
For example, we used this procedure successfully earlier this year in a case involving political risk-insurance coverage. The policy-holder claimed that its assets had been expropriated. The policy provided that compensation would be the net asset value (NAV) of the assets at the time of expropriation, and documents previously submitted by the policyholder had shown that the NAV at the time of expropriation was negative. We suggested to the sole arbitrator that, before considering the more complex issues of whether an expropriation had occurred, he determine whether the NAV was in fact negative at the time of the events in question. Both sides submitted evidence to the arbitrator on that separate issue, about which a hearing was held with witness testimony. The arbitrator agreed that the NAV was negative, so that even if an expropriation had occurred, no compensation would be due. It would not have made any sense for the arbitrator to have held a full hearing on all of the issues in dispute when that issue, which was easily heard separately, resolved the case.
The availability of discovery depends on the law of the jurisdiction in which the arbitration is held and the applicable rules. Most international arbitration rules provide that the arbitrators may order the parties to submit or to exchange documents in advance of the hearing. For example, the UNCITRAL Rules provide:
At any time during the arbitral proceedings the arbitral tribunal may require the parties to produce documents, exhibits or other evidence within such a period of time as the tribunal shall determine.
The ICC Rules state:
At any time during the proceeding, the Arbitral Tribunal may summon any party to provide additional evidence.
The AAA International Arbitration Rules state:
At any time during the proceedings, the Tribunal may order parties to produce other documents, exhibits or other evidence it deems necessary or appropriate.
The LCIA Rules list among the arbitrators' powers the ability:
to order any party to produce to the Arbitral Tribunal, and to the other parties. . . any documents or classes of documents in their possession, custody or power which the Arbitral Tribunal determines to be relevant.
These rules reflect the common practice in international arbitration with respect to discovery. In short, some document discovery is generally permitted, even in arbitrations in Latin America where discovery is rarely permitted in litigation. The difficulty in every case is for the arbitrators to determine how much discovery is appropriate. Tribunals now frequently apply the principles of the IBA Rules of Evidence, which generally permit the parties to obtain documents necessary for them to prove their case, but avoid the possibility of fishing expeditions. The IBA Rules of Evidence provide that the parties shall first submit to each other and the arbitral tribunal the documents on which they intend to rely. Following such an exchange, any party may submit to the arbitral tribunal a request that the other side produce additional documents. The request to produce must be more detailed than an American litigation document request. It must contain:
a discussion of a requested document sufficient to identify it or a description in sufficient detail (including subject matter) of a narrow and specific requested category of documents that are reasonably believed to exist.
The IBA Rules of Evidence also require the requesting party to include in its request certain additional information:
- a description of how the documents requested are relevant and material to the outcome of the case;
- a statement that the documents are not within the possession, custody or control of the requesting party; and
- why the requesting party believes the requested documents are within the other party's possession.
If the party to whom the request is directed objects to some or all of the requests, based on certain objections described in the IBA Rules of Evidence, then the arbitral tribunal will decide what requests to produce, if any, shall be enforced.
The IBA Rules of Evidence been used have very effectively in international arbitration for the past ten years. The IBA's Arbitration Committee is currently reviewing the Rules to determine whether they need to be revised or updated in any manner. The goal is to issue an updated IBA Rules of Evidence, if the Committee determines that any revision is necessary, by the end of 2009.
The ever-present use of electronic communication has made dealing with these discovery issues substantially more difficult. Even when discovery requests are narrowly and properly framed, they may still require a party to review and to produce thousands of email exchanges. This has complicated the arbitrators' task of determining, generally at a relatively early stage of the case, what discovery should be permitted and what should be denied as being irrelevant, excessive or improper for other reasons.
The challenge for arbitrators now will be to exercise this control and to develop innovative techniques in order to allow discovery of relevant electronic material without overwhelming the arbitration process. Given the large amount of communication that occurs electronically, it is unrealistic to exclude e-mails and other electronic communications from whatever discovery may be appropriate in a case. However, because electronic communications are filed and stored differently than paper documents, regular methods of describing document requests, such as 'documents concerning', do not work well and can cause a massive burden in searching electronic files. Therefore, parties and arbitrators need to develop new techniques, such as, for example, seeking documents only fitting certain electronic search terms and in within certain specified date ranges. A request framed in this manner may not catch every possible document that is relevant and material, but it would probably capture, in the right circumstances, a large majority of them, and the cost of conducting such a search would be much less.
Presentation of evidence
In order to make hearings more efficient, practitioners and arbitrators are increasingly using whichever techniques from civil law or common law procedures work best for that particular case. In particular, some of the following methods can significantly focus the presentation of evidence and shorten the duration of hearings.
Written direct testimony
Significant efficiency can be gained by requiring all witnesses to submit their direct testimony in writing in advance of an appearance at the hearing. This procedure permits the arbitrators and the parties to review the evidence in advance and to focus cross-
examination and the arbitrators' questioning on the most relevant and important issues. It is important for arbitrators to hear directly from witnesses and to be able to judge their credibility and the weight to be given to their evidence. This may be achieved, however, by requiring that any witness submitting direct testimony be available for cross-examination at the hearing, as provided in the IBA Rules of Evidence.
The use of written direct testimony may significantly shorten hearings. While there may be some additional cost in the preparation of such statements, it is usually not significantly different from the time that would be spent in preparing the direct testimony if it were given orally. Admittedly, written direct testimony is often drafted by counsel, rather than by the witness. It lacks the spontaneity and candour that may be present in oral direct evidence. However, arbitrators can gain sufficient experience with a witness in cross-examination to enable them to make the necessary judgments as to credibility and weight.
Written direct testimony is not appropriate for every case. In some cases, it is more important for a witness to be able to speak directly to the arbitrators, particularly where there are complex facts or significant details that need to be understood. In each case, however, parties and arbitrators should consider whether the presentation of evidence would benefit from this procedure.
Confrontation testimony — simultaneous questioning of two or more witnesses on the same issues — has been used by some arbitrators with great success. Where one or more issues have great importance in reaching the final determination on the merits, such as what occurred at a particular meeting or expert opinions on the viability of product design, it can be significantly more efficient to hear the evidence on that issue at once. Rather than hear one witness on the subject several days after an opposing witness testified on the same subject, it may be better to hear the witnesses' versions of the events together. Such a confrontation allows arbitrators immediately to determine where the witnesses are in agreement and where they have differences. Through questioning both witnesses simultaneously about those differences, the arbitrators can more easily draw conclusions as to whose testimony is more credible, more persuasive or more supported by documents.
The conduct of such confrontation testimony requires significantly greater preparation than the usual hearing. It is important for the arbitrators to understand the evidence that has already been submitted prior to such testimony, so that they can intelligently question the witnesses on their areas of agreement and disagreement. Moreover, the structure of the questioning must be carefully arranged in advance with the parties, and the parties must have ample opportunity to ask their own questions, particularly of the other side's witness.
Meeting of experts
A related procedure, also suggested in the IBA Rules of Evidence, is the standard English procedure of requiring experts to meet to discuss their conflicting reports following their submission and prior to any hearing. The experts attend the meeting without counsel, and they are instructed to prepare a list of those issues on which they have been able to reach agreement. Such a meeting can frequently lead to agreement on a substantial number of points and thus limit the testimony to be given at the hearing. Opposing experts are almost always professional colleagues. When forced to meet, they find it difficult to hold on to opinions espoused by the party that hired them if they are difficult to justify under the standards of their profession. An expert does not want to lose face to a professional colleague, and usually they do not want to leave without some areas of agreement. In some cases, the experts are able to reach agreement on so many issues that their appearance at the hearing becomes unnecessary.
The future of 'manifest disregard' in US law
Given the vast number of US courts decisions dealing with arbitration law, there are far too many issues to cover here. However, it is worth noting a Supreme Court decision this year that may have a profound effect on US arbitration law.
The decision in Hall Street Associates, LLC v Mattel, Inc, 128 S Ct 1396 (2008), arose out of a commercial landlord-tenant dispute between Mattel, the tenant, and its landlord, Hall Street Associates. The decision principally focused on whether parties could by contract expand the basis upon which a federal court can review and potentially vacate an arbitral award. The parties had agreed that a federal court could vacate the arbitral award if it found the arbitrators had made an erroneous conclusion of law. In holding that parties cannot themselves revise these standards and change the carefully prescribed balance between arbitration and judicial oversight, the Court's opinion in Hall Street focused primarily on the language of section 9 of the Federal Arbitration Act (FAA). It noted that 'there is nothing malleable about "must grant," which unequivocally tells courts to grant confirmation in all cases, except when one of the "prescribed" exceptions applies.' The Court noted that this interpretation substantiated the 'national policy favouring arbitration with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway.' It is apparent from this language that the Court continues to view arbitration as an efficient and flexible method of dispute resolution.
Although recent decisions interpreting the FAA have focused on the rights of the parties to negotiate and to enforce their agreements, Hall Street recognised that the FAA's promotion of party autonomy does not go so far as to override the explicit statutory language. The Court faced what was argued to be a conflict between the FAA's statutory language and Congress's intent that private arbitration agreements be enforced according to their terms. However, in holding that judicial review under the FAA is exclusively limited to the grounds listed in 9 USC sections 9 and 10 and may not be expanded by agreement of the parties, the Court respected both party autonomy and the efficiency of the arbitration process created by the FAA. The Court made clear that the parties' autonomy extends to the arbitration process itself, but that once an award is rendered, the courts have only the limited powers to review and overturn that award that are specified in the FAA. The Hall Street decision carefully preserved the benefits of arbitration and avoided a multitude of problems that could have arisen if parties had been given full authority to draft their own grounds for judicial challenges to arbitration awards.
The most important part of the decision may actually come from some dictum. The Court used this case as an opportunity to question the longstanding judicially created doctrine of 'manifest disregard of the law' as a ground for vacating arbitral awards. Hall Street had argued, and some lower courts have held, that the Court's dictum in Wilko v Swan, 346 US 427 (1953), that it may be possible for a court to overturn an award on the basis of 'manifest disregard of the law' provided an additional ground for vacatur beyond those in FAA, section 10. The Court rejected that argument by stating that it saw 'no reason to accord [Wilko] the significance that Hall Street urges'. The Court offered instead that 'manifest disregard' might have 'referred to the [section 10] grounds collectively' or that it 'may have been shorthand' for section 10(a)(3) or 10(a)(4), the subsections authorising vacatur when the arbitrators were 'guilty of misconduct' or 'exceeded their powers'.
This holding may have a far-reaching effect in limiting courts' review of arbitration awards. Lower courts, and perhaps the Supreme Court once again, will have to consider whether the doctrine of 'manifest disregard of the law' has any continued viability. In recent years, some American courts have used the doctrine more often to reverse awards, particularly in consumer and employment cases with which they had disagreed. In the Hall Street decision, however, the Supreme Court has made clear that the review of arbitration awards by courts is limited to those grounds specified in the FAA, and these grounds do not include 'manifest disregard'.