ARBITRATION UNDER THE MICROSCOPE

INTRODUCTION

In the past few decades, Arbitration has become a mainstay in resolving legal disputes. There are a plethora of articles which showcase the advantages of Arbitration while ignoring or simply giving a brief outline of the inherent dark clouds or cons of Arbitration. A closer look at the recent trend of inserting the Arbitration clause; one needs to wonder; Is Arbitration really the best mode of dispute resolution? This is a question which has plagued my mind.

As previously mentioned Arbitration has been promoted by many profound authors, article writers, and bloggers worldwide as an efficient way to resolve disputes. The advantages of Arbitration are once again outlined as follows:

Avoids hostility. Because the parties in an Arbitration are usually in agreement to the Arbitration clause and are encouraged to participate fully and sometimes even to help structure the resolution, they more often together peaceably rather than escalate their angst and hostility toward one another, as is often the case in litigation.
Usually cheaper than litigation: Arbitration is designed to be cheaper and more affordable for parties by putting in place all necessary mechanisms to ensure faster and less complicated resolution of issues. Lower cost is also partly due to the fact that the rules of evidence are often more relaxed than in a trial, so that documents can be submitted in lieu of having a witness come to trial to testify. Arbitration is designed to consume less time than litigation, in order to save time and money. According to a recent study by the Federal Mediation and Conciliation Services, the average time from filing to decision was about 475 days in an Arbitrated case, while a similar case took from 18 months to three years to wend its way through the courts.
Flexibility: Unlike trials, which must be worked into overcrowded court calendars, Arbitration hearings can usually be scheduled around the needs and availability of those involved, including weekends and evenings. Arbitration is less formal than court proceedings and the arbitral tribunal may conduct arbitration in such manner as it considers appropriate if the parties fail to agree on the procedure to be followed (Article 19 of the Model Law on International Commercial Arbitration). Arbitration also allows the tribunal to adopt the inquisitorial system which involves search for the truth largely through the tribunal’s own investigations if deemed necessary. This in turn saves time and money as against the procedure of evidence law applicable in court.
Parties are attracted to the less formal nature of arbitration which encourages speed and hence a less costly way of settling disputes. The flexibility of arbitration extends to the freedom to choose the venue of the arbitration and the language and the seat of the arbitration whether in the contract’s arbitration agreement itself or at a later stage. This decision allows parties from different legal jurisdictions and different legal systems to pick a neutral venue or a venue that is arbitration-friendly or convenient for them. This helps parties of different legal jurisdictions having a single seat avoids the complications relating to conflicting laws
Simplified rules of evidence and procedure. The complex rules of evidence and procedure do not apply in Arbitration proceedings. This makes Arbitration more adaptable to the needs of those involved. Arbitration also dispenses with the procedure called discovery that involves taking and answering interrogatories, depositions, and requests to produce documents such procedures are regarded as a delay tactic of litigation. In Arbitrations, most matters, such as who will be called as a witness and what documents must be produced, are handled with a simple phone call. Furthermore, rules of evidence which may prevent some evidence from being considered by a judge or a jury, this rule does not apply to arbitration. Thus, an Arbitrator’s decision may be based on information that a judge or jury would not consider at trial.
Privacy and Confidentiality. Arbitration proceedings are generally held in private. Parties may agree to keep the proceedings and terms of the final resolution confidential. Both of these safeguards can be a boon if the subject matter of the dispute might cause some embarrassment or reveal private information, such as a company’s client list.
Finality: in most legal systems, there are very limited avenues for appeal of an arbitral award. So that the Arbitration will be the end of the dispute. This gives finality to the Arbitration award and parties are advised take the Arbitration decision in good faith.
Enforceability of Arbitration Awards: The ability to enforce an arbitration award another advantage of arbitration. For example; The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) as well as the UNCITRAL Model Law on International Commercial Arbitration 1985 and the UNCITRAL Arbitration Rules 1976, provides for recognition and enforcement of Arbitration Agreements and the resulting awards which has received a wide spread acceptance and uniformity of arbitration laws. Therefore arbitration awards between contracting parties form different countries will be easily enforced in the country where they expect to enforce an award provided that such a country is a signatory to the Convention or another treaty that obligates it to enforce arbitral awards.

DISADVANTAGES OF ARBITRATION

Going against the authors tradition of garnishing Arbitration as a concept and simply stating the cons of Arbitration in bullet points, it is my view that a closer analyses of the advantages of the so called advantages of Arbitration will reveal the cloud within the silver lining of Arbitration. This will help parties to any transaction to be truly aware of the possible drawbacks of Arbitration and to make an informed decision about whether to enter or remain in a consumer transaction that mandates it — or whether to choose it as a resolution technique if a dispute arises or whether the descision to insert an Arbitration clause should be beyond the copy and paste of the Arbitration clause precedent because it makes the contract look longer, more prestigious and more complicated.

The disadvantages include the following:

Privacy: the fact that Arbitration proceeding are not held in a public forum and that Arbitration records are regarded as private documents may be considered to be advantageous by many; however on taking a closer look at the so called advantage will show that the privacy breeds Lack of transparency. The lack of transparency caused by the privacy of Arbitration makes it more difficult to spot bias. This is also made worse by the fact that Arbitration decisions are rarely reviewed by the courts as a result of the fact that parties sometimes agree to keep the proceedings and terms of the final resolution confidential. In order to avoid some embarrassment or publication of private information, such as a company’s client list.The privacy of Arbitration proceedings and records also gives rise to a Lack of access Precedents on previous Arbitration decisions. Therefore it is difficult if not impossible to apply the rule of stare decisis rule. This in turn contribute to a high level of uncertainty by the parties on the outcome of Arbitration.
Flexibility which is one of the most well known tailored and tailorable advantages of Arbitration depicts that Arbitration hearings can usually be scheduled around the needs and availability of those involved, including weekends and evenings and holidays. However like the artribute of privacy, the flexibility of Arbitration may also breed lack of transparency, and precedents. It has also been seen lately that arbitration procedures are becoming equally as complex as the court system and infact holds very few difference to court processes. It can be assumed that arbitration is copying court litigation and as arbitration has developed, the procedures too have become as complicated. It is hoped that the UNCITRAL Notes on Organizing Arbitral Proceedings 1996 will weed out potential problem areas.Another disadvantage of flexibility is embedded in the standards used by an Arbitrator which are not clear. Generally the arbitrator cannot depart from the law which is a guide to all arbitration panels. However, sometimes Arbitrators focus on the equity of “apparent fairness” of the respective parties positions instead of strictly following the law, which would result in a less favorable outcome for the party who would ordinarily be favored by a strict reading of the law.
Cost: Parties to a transaction are encouraged to resolve disputes by Arbitration because Arbitration was designed to be a cheaper alternative to litigation, however experience also indicates that parties often tend to underestimate the costs of Arbitration. The idea of Arbitration being cheaper than litigation has become a myth. Within the last decade, Arbitration which was characterized as being less expensive has been argued to have become very expensive that even the most enthusiastic advocates in international Arbitration have argued that it has become the most expensive mode of dispute resolution. The rising cost of Arbitration is beginning to be a cause for alarm and in fact will make many parties give up half way. According to a recent survey by a consumer watchdog group called “Public Citizen”, Price Waterhouse Coopers (PWC) in corroboration with the school of international Arbitration at the Queen Mary University of London the cost of initiating Arbitration is significantly higher than the cost of filing a lawsuit.There are many factors to consider in the cost of Arbitration such as the Arbitrator’s fees which is much higher in the event that a panel of 3 or more arbitrators are involved. It is not unusual, for example, for a well-known Arbitrator to charge a per day or per hour basis for his or her services or their services in the case of a panel. this could run the cost of arbitration into hundreds of thousands or even millions of Naira; transportation and accommodation of the Arbitrator is also borne by the parties and such cost may be even higher in the case that the seat of Arbitration is out of jurisdiction; administrative costs which is becoming more costly as more experienced lawyers take up the cause; parties also bear the cost of any expert witness called; Parties are also required to higher and pay their stenographers for the testimony and pleadings such charges are also incurred sometimes on a daily basis; which is by no means a cheap endeavour. Other costs ancillary to the logistics of the Arbitration (renting a room for the hearing, videoconferences, etc.) also apply
Simplified rules of evidence and procedure. The complex rules of evidence and procedure do not apply in Arbitration proceedings in order to make Arbitration more adaptable to the needs of those involved as well as to save time and expenses. For example discovery may be more limited with Arbitration. In litigation the important process like discoveries is dispensed with in Arbitration. Discovery which involves taking and answering interrogatories, depositions, and requests to produce documents from an opposing party, or even a person or business entity who is not a party to the case to provide certain information or documents. This process is often discarded as a delaying and game-playing tactic of litigation. As a result, many times Arbitration is not agreed to until after the parties are already in litigation and discovery is completed. By that time, the opportunity to avoid costs by using Arbitration may be diminished
Third party proceedings: Unlike litigation, Third Party Proceedings are more difficult to execute as a result of the fact that a Third Party who may share in liability one way or the other in the transaction in dispute cannot be compelled to join in proceedings. Such third party can only be joined in Arbitration proceedings upon his consent. Kelly v. Tri Cities Broadcasting (1983) 147 CA 3d 666; Melchor Investment Co. v. Rolm Systems (1992) 3 CA 4th 587.)
The fact that the court procedures are not strictly adhered may also lead to the cases where certain evidence may be admitted (for example hearsay) which is strictly not allowed in litigation due to the unavailability of cross-examination to test the accuracy of the statement.
Finality; A final and binding decision is hard to shake as both parties often give up their right to appeal. The finality of Arbitration therefore breeds limition of recourse. There is no automatic right of appeal even if the Arbitrator makes a mistake of fact or law, depending upon the Arbitration clause or the Arbitration legislation. Parties need to expressly agree to an appeal procedure in their Arbitration agreement. Therefore, the remedies for a party who is dissatisfied with the Arbitration award is limited. If the Arbitrator’s award is unfair or illogical, this cannot be reviewed on the basis that the Arbitrators made a mistake of fact or a mistake of law, but only on the basis that the Arbitrators misdirected their mandate. A consumer may well be stuck with whims and prejudices of a single Arbitrator and barred forever from airing the underlying claim in court. The most plausible way to remedy an Arbitration decision is to file a suit in court overturning the arbitral award on grounds which are difficult if not impossible to prove.
Enforceability of Arbitration Awards: bearing in mind the existence of The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) as well as the UNCITRAL Model Law on International Commercial Arbitration 1985 and the UNCITRAL Arbitration Rules 1976, who’s primary aim is to provide for recognition and enforcement of Arbitration Agreements the problem in international arbitration remains apparent. An international arbitration may present the practical challenges associated with international business dealings. For example, an international arbitration may require learning the substantive law of a foreign jurisdiction, or new rules of procedure which may appear “backward” compared to any previous experience. In addition, challenges such as linguistic differences and the need for use of a translator (or even multiple translators) may further complicate and draw-out the arbitration proceeding. The situation where enforcement of an arbitration award in a country which is not signatory to the New York convention or the UNCITRAL Model Laws, such enforcement procedure may remain elusive and expensive.
Uneven playing field. Some are concerned that the “take-it-or-leave-it” nature of many Arbitration clauses work in favor of a large employer or manufacturer when challenged by an employee or consumer who has shallower pockets and less power. Also In situations where the Arbitrator is reliant on one party for repeat business (1), then the potential for abuse is present as there may be an inherent incentive to rule against the consumer or employee and the advantage of impartiality is lost.
Questionable Objectivity. Another concern is that the process of choosing an Arbitrator is not an objective one, particularly when the decision-maker is picked by an agency from a pool list, where those who become favorites may get assigned cases more often. Parties to the dispute may also agree on the Arbitrator, so the Arbitrator will be someone that both sides have confidence will be impartial and fair. However An Arbitrator chosen by a party within an industry may be less objective, more likely to be biased in favor of the appointing group Adding possible complication. An Arbitrator’s desire to obtain future retainers may result in compromise or “splitting the baby” awards. The Arbitration agreement which does not set out the qualifications or the organization that administers the Arbitration, as well as the bias and competency of the Arbitrator also stands as a risk of additional complications to Arbitration proceedings.
Speed: Arbitration is designed to consume less time than litigation, in order to save time and money; however in the wordings of the Eminent Law Lord; Lord Denning “arbitrate do not litigate” as he stated in the case of Bremer v. Vulcan (1980) as reiterated in the case of P S Abdullah v. D.F.R. (1982). Lord Denning stated that “when I was a young man, a Scottish man use to parade this court with his board back and front written “arbitrate, do not litigate”, this was a good advise in so far as arbitration is resolved speedily, but it is bad when arbitration beginnings to drag forever ” . Lord Denning was accurate in his statement as many elements may affect the duration of litigation and thereby increasing the cost of the arbitration tremendously and frustrating parties. For instance; when there are multiple Arbitrators on the panel, juggling their schedules for hearing dates in long cases can lead to delays.In a bid to speedily resolve issues, Arbitration has discarded procedural issues like discoveries third party proceedings and Joinder of parties. The requirement for speed and the requisite discarding of these very important procedural steps may lead to the a rush of proceedings. This rush in turn may lead to salient issues not being resolved and “we know that “ justice rush is justice quashed”.Arbitrators are also generally unable to enforce interlocutory measures against a party, making it easier for a party to take steps to avoid enforcement of an award and even resile at mid stream in the arbitral proceeding at any time if due care is not taken. Another issue under this heading is the issue of enforcement of Arbitration awards. Unlike court judgments, Arbitration awards themselves are not directly enforceable. A party seeking to enforce an Arbitration award must resort to judicial remedies, called an action to “confirm” an award. This reversion to the courts defeats the advantage of speed as attributed to Arbitration as efforts to confirm the award can be fiercely fought, thus necessitating huge legal expenses that negate the perceived economic incentive to Arbitrate the dispute in the first place. And also such a motion for annulment of an Arbitration award or a motion for confirmation is not confidential which also defeats the attribute of privacy. Unless agreed upon in advance, the process for selecting an Arbitration institution, the specific Arbitrator and the number of Arbitrators could significantly delay the Arbitration process.
Subject Matter Not Capable of Settlement: Parties to a transaction are at liberty to choose Arbitration as their dispute resolution mechanism; however not all disputes can be settled by Arbitration, for example criminal matters or matters of public law (such as intellectual property rights; dispute over the validity of a patent, fraud). Additionally an Arbitrator may not have the power to grant remedies that a court can. There is support for the view that a court will refuse to stay proceedings in support of Arbitration if the Arbitrator cannot award the remedy claimed. In the case of Hashim bin Majid v. Param Cumaraswamy, an application to stay court proceedings was refused on the grounds that one of the remedies claimed by the plaintiff was a dissolution of the partnership and the court was of the view that this was not an issue that could be decided by an Arbitrator.3

CONCLUSION

In any transaction or anticipated business dealings the decision to exclude the ordinary jurisdiction of the courts of law must always be made after careful consideration, and must go beyond simply indulging in the fad of copy and past of Arbitration Clause in any agreement. Parties must recognize the fact that each transaction is relative and must be careful not to assume that what was effective in a given context will produce the same results in each particular case which may arise. Hasty and impulsively Decisions may easily lead to a disastrous outcome.

Given the possible perils and unevenness for those who unwittingly enter the arbitration clauses in contracts, it is only wise that parties should consider a number of factors to become better informed and, possibly, ward off a bad experience. Such factors include but are not limited to the following:

The importance of confidentiality;

The ability to anticipate the type of disputes that are likely to arise: The choice to arbitrate or litigate will probably turn on whether you will need full discovery from the other side; selecting arbitration risks truncated discovery, unless specified otherwise.

The parties involved in the transaction ie. Whether or not the government is a party as the government may seek immunity from disclosure of documents which are key to proving a case. Immunity considerations may be diminished within the confines of a confidential arbitration;
Whether or not the dispute is international. Arbitration may control risks of foreign law or conflict of laws e.g. Sharia law and home bias;
The level of complexity of the case as well as the need for an expert panel and witnesses.