October 2020

BG: Abritration – Swiss Army Knife or Blunt Tool?

Arbitration was once touted as the shiny saviour to international dispute resolution, transcending uncertain, costly, and time-consuming national courts. Like the Swiss army knife, arbitration rules are replete with extensive powers of the tribunal against parties to the arbitration. But, armed only with adverse costs orders to enforce these powers, a tribunal’s toolbox still lacks the pointed powers inherent in court processes to coerce, sanction or dispose of issues to resolve a case swiftly. Without an effective sanction, a recalcitrant defendant may choose not to participate in arbitration proceedings, titling the costs of the process against an aggrieved claimant. Consent as a cornerstone of arbitration has as many benefits as it does problems, particularly in international trade disputes, involving multiple parties, various contracts, and goods in different jurisdictions. For all the benefits and unique features that arbitration enthusiasts are eager to promote, here are 5 problem areas they don’t tell you.

(1)  No shortcut for debt claims

International arbitration envisages sophisticated contracting parties resolving their disputes across the table. The motley crew of defaulters, fraudsters and opportunists however do not see the need to come the table, particularly in cases of non-payment or debt claims. Arbitration, unlike the court process is not equipped to provide default judgement in the case the defendant does not participate. Where a defendant does participate and puts up a meek defence that doesn’t raise any issue warranting a trial, the arbitrator (unlike a court judge) is reluctant to give summary judgement. This means that a claimant has to incur the time, and more critically the costs, in pursuing a defendant without a credible defence. The SIAC Rules have sought to introduce early dismissal of claims and defences that are “manifestly without legal merit” but this in practice is very different from court-style summary judgment. Early dismissal in arbitration is more akin to striking out a party’s position, while summary judgment in court is designed to dispose of a dispute without the need to proceed to trial. Without summary or default judgement processes available in courts, a defendant can choose to test the claimant’s patience and financial resolve either by putting up makeshift defences or not participating in the proceedings, at the claimant’s expense of putting up funds to run the arbitration.

(2)  Costs – Forking out upfront

Arbitration, unlike the court process, is a private resolution mechanism, which means it needs to be funded by the parties, and these costs are typically reimbursed by the losing party in the tribunal’s award. Most arbitration institutions adopt an ad-valorem scale to arbitration fees, which means the costs of the arbitration are pegged to the quantum of the claim. This approach however may work against a party pursuing a large debt or otherwise straightforward claim. The problem is further compounded by a defendant that chooses not to pay its share of arbitration fees, which means the burden of covering the costs of the arbitration process upfront falls completely on the claimant. For a claim of US$10m to be resolved by a three-member SIAC tribunal, the costs of proceedings to be paid upfront can range between US$300,000-US$400,000. An investment of that level to secure an award without a guarantee of repayment can at times be debilitating for any claimant to pursue an arbitration. And the crafty defendant knows that.

(3)  Getting a third party involved

Arbitration agreements are standalone agreements which bind parties that agree them. But in cases of string contracts or where there are numerous contracts connected to the same transaction, it may be challenging to get the correct party or evidence before the tribunal. Financing documentation between lenders and borrowers typically invoke court processes while trading documentation between borrowers and their buyers, rely on arbitration clauses and even then, may not mirror the arbitration clause used in a string of contracts. Once again unlike court processes, arbitration tribunals may not have the reach of dragging a third party kicking and screaming into the arbitration process – a tribunal only has jurisdiction over parties that have agreed to the arbitration agreement and lack of consent is typically fatal to involving a third party. The same difficulty manifests when seeking to obtain evidence from a third party e.g., inspection companies, who are not parties to the dispute. The tribunal being a creature of consent, will struggle to compel a third party to disclose evidence or present itself as a witness, relying instead on local courts to give effect to its orders.

(4) Securing the asset – interim relief

Most arbitration rules provide for the powers of the tribunal to order interim relief, for example the preservation of assets or freezing injunctions while the dispute is pending determination. The consensual nature of arbitration means that such orders are effective only against the parties to the arbitration and not against third parties who are outside of the tribunal’s jurisdiction. A third-party buyer of goods in China may see no compulsion to follow an order of a Singapore arbitration tribunal. A court-ordered freezing injunction against a defendant is particularly effective because it contains a penal sanction for third parties that breach the order, and this often stifles a defendant’s bank from moving funds out. A tribunal’s freezing injunction however does not have the same reach or consequence when it comes to third parties such as banks.

(5) Guerrilla tactics – delays and non-compliance

Without penal or coercive powers to sanction non-compliance with the arbitration timetable, shrewd parties may engage in guerrilla tactics to delay, derail or frustrate proceedings. Exploiting a prevailing “due process” paranoia, defendants may dip in and out of an arbitration to frustrate proceedings, periodically firing new evidence into the proceedings at the last minute. Concerned with enforcement challenges on grounds of due process, a tribunal may not have the stomach or means to sanction such tactics save for adverse costs awards, which may be cold comfort when it comes to defiant defendants bent on avoiding payment.

Even before taking on the treacherous exercise of enforcing an international arbitration award in regional courts, recalcitrant parties may turn the arbitration process on its head by testing the resolve of a claimant to throw good money after bad. While the powers of tribunals are more extensive than before, the different options available to a claimant in arbitration may yet prove a blunt tool particularly for debt claims against defendants based in tricky jurisdictions.

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