With businesses tightening their belts and avoiding costly disputes, arbitration practitioners need to show they can still deliver results and value, say Stephen Jagusch and Andrew Pullen

International arbitration has, for many years, experienced extraordinary growth. A greater range of parties use arbitration for a wider range of disputes. Arbitration faces a number of challenges, however, not least from the fact that at a time of recession resources are stretched and businesses want to focus their resources on the productive parts of their business rather than on fighting disputes. Moreover, they want value for money, which translates into a desire for greater efficiency and effectiveness across a broad array of disputes.

Arbitration and finance

Banks have traditionally favoured the courts in a small number of trusted jurisdictions to resolve disputes under international financial contracts. Recent years have seen an upsurge in the use of arbitration by financial institutions in contracts with parties from emerging markets. Lawyers now find themselves advising on arbitration clauses in financial contracts on a regular basis.

Financial institutions' interest in arbitration is primarily driven by enforcement advantages. The New York Convention provides a framework for the enforcement of arbitral awards in over 140 states, whereas there is currently nothing comparable for court judgments. Banks operating in the London market have recognised that an English court judgment cannot be enforced in many counterparties' jurisdictions and now regularly include arbitration clauses in their contracts. Arbitration clauses have become common in finance transactions, especially in Asia.

We can expect to see a much larger number of arbitrations involving banks in the next few years, as these clauses give rise to arbitral proceedings. The effectiveness and efficiency of those proceedings (or lack thereof) will no doubt affect the enthusiasm of banks for arbitration as a dispute resolution method in the future. However, barring a major reversal of globalisation, the increased use of arbitration by financial institutions seems likely to continue, driven as it is by the requirement to access a neutral forum whose decisions can be enforced.

Option clauses

Option clauses permit one or more parties to a dispute to choose between arbitration and litigation after the dispute has arisen. Banks have typically been able to insist upon jurisdiction clauses that allow them to bring proceedings in any competent court while the borrower is compelled to sue in one named jurisdiction. While financial institutions are not the only users of option clauses, following their traditional preference for keeping their options open, they have warmly embraced option clauses when using arbitration and we now see many more such clauses. A typical clause in a finance document provides for litigation as the default method of dispute resolution, with a unilateral option for the finance parties to choose arbitration.

There are two worrying trends, however. First, option clauses are often worse-drafted than they could be. For example, the mechanics of how and when the option can be exercised are often unclear.

The second issue is more profound. Option clauses have been upheld as valid arbitration agreements in a number of jurisdictions, including England, but in some their validity is doubtful or worse, either because they are not considered to contain a definitive agreement to arbitrate or because a unilateral option is perceived as unfair and against public policy. Unfortunately, this includes some key emerging market jurisdictions, such as Russia.

Too often, finance parties include an option clause as a matter of course, without thinking through whether it is really beneficial in the case. Some jurisdictions where option clauses are problematic have a patchy record on enforcing arbitral awards. Using an option clause may well be handing a counterparty an extra argument to resist enforcement. If all the counterparty's assets are in jurisdictions where a judgment will not be enforced, using an option clause, rather than a straightforward arbitration clause, may increase the risk that an award may not be enforced to no practical benefit. Arbitration practitioners should be encouraging their clients to make educated decisions on when to use option clauses as part of the overall risk management of the deal, and not simply to regard them as boilerplate.

Efficiency of the arbitral process

Complaints that arbitration takes too long and costs too much are not new. But they are getting louder. This is, in part, a consequence of the increased complexity and value of the disputes being resolved. But the golden rule of arbitration is that it is based on consent. If it were no longer perceived as an attractive dispute resolution method, parties would withhold their consent and choose alternatives. Clients tell us that in the current economic climate, it is more important than ever that they control their legal spend. Arbitration must stay competitive.

The good news is that arbitrators, counsel and institutions are alive to this issue and debating how to tackle it. Even better, some of the users of arbitration – the clients – are joining in. Michael McIlwrath and Roland Schroeder of GE, for example, have strongly encouraged arbitrators to identify and decide key issues at an early stage, thereby disposing of the case entirely, narrowing the scope of the remaining dispute, or facilitating a commercial settlement. That approach would, no doubt, also be popular with financial institutions, which bemoan the absence of summary judgment in arbitration.

The solution to the problems of increasing time and costs requires effort on the part of arbitrators, counsel and parties. Arbitrators should not accept appointments for which they are too busy. Parties and counsel should consider whether a big name arbitrator is really required for a dispute. Arbitrators should be prepared to enforce deadlines. Parties and counsel should comply with them. All should take advantage of the flexibility of the arbitral process, for example by agreeing or imposing limits on submissions, disclosure requirements or experts, where appropriate. One of the authors was recently involved in an arbitration in which the substantive hearing was scheduled six months after service of the request, with the parties agreeing to one round of submissions plus witness statements. Arbitration can still be an expeditious dispute resolution method if managed well, but there is no room for complacency.

E-disclosure

A particular threat to the cost-effectiveness of arbitration looms in the form of electronic documents. There is no doubt that arbitrators and counsel need to understand the key features of electronic documents in order to manage document production fairly and efficiently. However, as more and more documentation is electronic, there is a danger that e-disclosure practices from those jurisdictions with most experience of it, which are inevitably those whose court systems have wide-ranging disclosure regimes, creep into international arbitration practice.

Arbitration practitioners must be vigilant and guard against practices that would damage arbitration. There is no general duty of disclosure in arbitration, and document production should be closely controlled. Although the US and English courts have each wrestled with the challenges of e-disclosure, the approaches adopted by the courts cannot and should not simply be transplanted. Indeed, there would be a particular irony in doing so when the English Commercial Court appears to be inching towards a disclosure process more like document production in arbitration, in order to limit the burden and cost to the parties.

Debate will continue on the right techniques to use in arbitration. An ICC task force is currently considering this, and other bodies will continue to do the same. The priority must be to ensure arbitration retains its efficiency.

Reform of the Brussels Regulation

The well-known West Tankers case, in which the European Court of Justice held that the English courts must not enjoin parties to an arbitration agreement from continuing court proceedings in other member states, highlighted the interaction between arbitration and the Brussels Regulation.

The relationship between arbitration and the regulation now seems likely to be altered. The European Commission recently published a green paper in which it seeks views on a range of reforms to the regulation, including a deletion or partial deletion of the exclusion of arbitration from its scope.

There are problems in the interface between the regulation and arbitration (not least due to the judgment in West Tankers, which has created uncertainty as to whether a judgment rendered in disregard of an arbitration agreement must nevertheless be recognised in another member state). Some of the proposals, such as a rule permitting a court to refuse enforcement of a that is irreconcilable with an arbitral award, appear sensible.

Others, however, do not appear to be fully thought through and would promote the role of the court at the expense of the tribunal, at the risk of undermining the principle of competence-competence and encouraging costly applications to court for declarations of the validity of arbitration agreements.

Given the far-reaching impact of the proposals, it is disappointing that the Commission has allowed only two months for the consultation period (closing on 30 June 2009). Arbitration practitioners need to speak up now: whatever reforms are implemented, their effects will be felt for many years to come.

Stephen Jagusch is a partner and Andrew Pullen a senior associate at Allen & Overy.