by Martin Harman

In the autumn of this year I had the dubious pleasure of celebrating the 10th Anniversary of the publication of the Terms of Reference in an administered arbitration, which is still lumbering towards its own uncertain conclusion. At the time of our appointment as lawyers for one of the parties, which was shortly after the issue of the Terms of Reference, I toyed with the idea of proposing to my client a fixed fee for taking the case to conclusion. It seemed to me that this was quite a “cutting edge” concept at the time and I thought to myself that whilst the risk of such a course of action taken at the outset of hostilities could be very high, I mused that following close of pleadings and the crystallisation of the issues in dispute within the Terms of Reference, the task of assessing the likely future costs would not be beyond the whit of the reasonably experienced lawyer. I therefore felt that the risk of taking a bath on the fixed fee would not be that great. However, some little voice within me clearly counselled caution and as a result I did not make that proposal. Whilst this has saved me from a personal embarrassment and possible lynching by my partners, nevertheless my client has suffered because the case has taken a course which nobody could have predicted at the time when the Terms of Reference were agreed.

Regrettably this sort of situation is not an isolated occurrence. In another non administered arbitration, there was a thirteen month delay between the conclusion of the Hearing and the issue of a Partial Award which, although eagerly anticipated proved somewhat of a disappointment since it merely ordered the appointment of a Tribunal Expert to deal with all the difficult issues which had in any event been before the tribunal at the original hearing. As a consequence the Tribunal Expert effectively had to replicate a substantial part of the original evidential hearing, leading to further delay and increased cost.

The reason behind both of the above examples was essentially arbitrator unavailability. It was therefore with a gladdening heart that I read the recent ICC press release on the issue of their new Statement of Acceptance Availability Independence for ICC Arbitrators. This now requires prospective arbitrators not only to sign a statement of independence but also a statement confirming that they “can devote the time necessary to conduct this arbitration diligently, efficiently and in accordance with the time limits in the rules”. The statement reminds prospective arbitrators that the conduct of the arbitration and its duration will be taken into account when fixing the arbitrators fees. Thus the ICC can now impose financial penalties upon recalcitrant arbitrators and, as a last resort, can require the removal of such arbitrators.

Whilst the statement of the ICC and its sanctions are to be welcomed, it remains the case that it is the long suffering client who has to foot the bill for an extended hearing or, worse still, the delay and disruption caused by the removal of an arbitrator. However one must not cavil unreasonably since the ICC are clearly endeavouring to cure a particular ill and they have armed themselves accordingly. My musings then took a different turn to wonder to what extent parties give consideration to the legal relationship which they establish when they incorporate into their contract a clause which names an Arbitral Institution as the body which will appoint their tribunal in default of agreement and oversee and manage the dispute resolution process. In my experience it is rare for parties even to get remotely exercised in the content of the arbitration clause generally let alone to devote time considering the somewhat esoteric concept of the legal relationship which they are entering into with the appointing body. This is unfortunate and such issues should be addressed before contract signature.

If the relationship is one of contract, what are its terms and what are the obligations on each party? More importantly what are the immunities which the Institution may enjoy by law? Under English law, such immunities are limited and reflect, broadly, insofar as the appointment process is concerned, the type of immunity enjoyed by arbitrators themselves. But query what if there is a failure by an Institution, such as the ICC, properly to police the conduct of the arbitration or indeed to avail itself of the sanctions with which it has expressly equipped itself to overcome delay. Loss will be suffered by the parties, is the Institution’s failure actionable by the parties to recover that loss? If so, what would be the extent of any immunity from suit?

The answers to these questions may be found in the rules of the Institutions concerned but the essential point which I want to emphasis is that parties and their advisors should at least ask themselves certain questions before they simply incorporate a clause which grants to an Institution a hugely significant role in the processing and resolution of disputes. A properly considered and drafted dispute resolution clause in a contract will always pay dividends. It will be a disincentive to the party who wishes to embark upon proceedings simply to delay a matter or to achieve another non project specific strategic objective. Equally a poorly drafted dispute resolution cause and a failure properly to have regard to the role of the Institution whose function is of such critical importance, could lead to parties waiting ten years or more for their disputes to be resolved. The choice is that of the client and its advisors. I urge parties and their lawyers to give these matters careful attention at the contract preparation stage and I would counsel caution before surrendering control over the dispute resolution process by simply cutting and pasting into your contract, a standard institutional clause.

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Kluwer Construction Blog

by Andrew Ness

U.S. courts in recent years have imposed stricter obligations on individuals sitting as arbitrators to disclose to the parties fully any facts or circumstances that may give rise to doubts about their impartiality or independence. As a result, the arbitrators’ mantra has become “disclose, disclose, disclose.” Indeed, it has become fairly common in arbitrations under U.S. law to see arbitrators making continual disclosures throughout the arbitral process as to every minor event that could possibly be seen as questionable – such as receiving a phone call from an old college friend who happens to be a partner at the same large firm as is representing one of the parties, even though the old friend is in a different city and different practice area entirely, and has no connection whatever to the pending arbitration. Under a recent change in American Arbitration Association (AAA) Construction Industry Rules, the parties and their counsel now get to play the disclosure game as well.

The AAA Construction Industry Rules (formally the “Construction Industry Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Construction Disputes)”) are the rules most often selected for domestic U.S. construction arbitrations, and are used in many trans-national cases as well. The AAA Construction Industry Rules as most recently revised (effective October 1, 2009) now provide (in Rule 19(a)) as follows with respect to the applicable disclosure requirements (new language in italics):

“Any person appointed or to be appointed as an arbitrator as well as the parties and their representatives shall disclose to the AAA, as promptly as practicable, any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives. Such obligation shall remain in effect throughout the arbitration.”

So in an AAA construction arbitration, the parties and their counsel now have just as extensive disclosure obligations as do the arbitrators themselves. That means if counsel for one of the parties learns that her partner in a far-away city is buddies with one of the arbitrators, and this connection has not previously been disclosed, presumably she will now be the one to disclose it. It seems eminently predictable that disclosures by parties and counsel of facts giving rise to justifiable doubts about the impartiality of an arbitrator is rife with immense potential simply to embarrass everyone involved. And not just the embarrassment associated with having to call to everyone’s attention some relationship that, at least arguably, the arbitrator should have disclosed earlier himself. What if, instead of an old college friend, she learns instead that one of her partners is having an affair with the married arbitrator? In a hurry, this seemingly innocuous new rule could get very interesting indeed. Stay tuned. The American preoccupation with disclosing everything may lead down an interesting path.

Kluwer Construction Blog

by Andrew Ness

While arbitration is often touted as being a less expensive alternative to litigation, the initial cost of initiating arbitration has always been considerably more expensive than filing in court. Typical filing fee in a U.S. court is a few hundred dollars, while administering authorities typically have filing fees in the thousands of dollars. The American Arbitration Association (AAA), self-described as “world’s leading provider of conflict management and dispute resolution services,” is known for its high filing fees that get progressively greater as the amount in dispute rises. But the AAA will now be providing claimants some relief on that front.

The AAA has initiated a new Flexible Fee Payment Schedule intended to provide cost-savings to claimants. The new option is a pilot program available on all cases filed under the AAA’s construction and international rules (as well as the commercial and employment rules) through May 30, 2010.

Here is how it works. Instead of paying a single initial filing fee, the claimant pays a smaller initial filing fee and then a “Proceed Fee” within 90 days. For example, for a construction claim of $1 million, the initial filing fee is $1,000 and the subsequent Proceed Fee is $5,600. The initial filing fee under the AAA’s standard fee schedule would be a single payment of $6,000. The Flexible Fee option is supposed to provide a cost savings, but the combination of the initial fee and the full Proceed Fee is higher than the single initial fee under the standard schedule. So, where is the cost savings? The answer is: the savings come only if the parties appoint their arbitrators without assistance from AAA. If the parties are able to agree on their arbitrators, there is a 50% discount on the Proceed Fee. So, in the example above, the combination of the initial fee and discounted Proceed Fee becomes $3,800 – a savings of $2,200 compared to the standard fee.

Procedurally, if the claimant elects to proceed under the Flexible Fee option, the AAA will notify the respondent of the demand and set the date for filing the answering statement and any counterclaim, but then does nothing more until the Proceed Fee is paid. The Proceed Fee must be paid within 90-days or the AAA will administratively close the file. This 90-day window is for the parties to agree on the appointment of the arbitrators. If they succeed, the claimant pays the discounted Proceed Fee, and the AAA proceeds with the arbitration. If not, the AAA will conduct its standard arbitrator appointment process once the full Proceed Fee is paid.

So the new option provides greater flexibility and offers the potential for cost-savings if the parties can appoint their own arbitrators. Where there is a high likelihood that the parties will not be able to mutually agree on the arbitrators and no immediate settlement is in prospect, the AAA’s standard fee schedule remains preferable. Complete details and a schedule of the fees under the standard and Flexible Fee options can be found at the end of the AAA’s construction industry arbitration rules on the AAA’s website (www.adr.org).

Todd Wagnon
Andrew Ness

Kluwer Construction Blog