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Alternative Dispute Resolution Mechanisms: Arbitration and Mediation

Introduction

In a traditional legal setting, parties often take disputes to the court of law of the relevant jurisdiction. Recently, however, Alternative Dispute Resolution (ADR) procedures are becoming increasingly commonplace in dispute resolution. There are a range of ADR mechanisms, including mediation and arbitration, which parties may choose from to resolve disputes. To this end, parties involved in a dispute may agree on the preferred dispute resolution method through incorporating a clause to this effect in their agreement; however, parties may also consent to a method after a dispute has arisen.

The International Chamber of Commerce (ICC) has laid out two separate sets of rules for arbitration and mediation proceedings respectively. It also has a special set of rules for construction disputes, the Dispute Board Rules, which provide for different types of dispute boards to be used on projects. The ICC is also responsible for the DOCDEX resolution procedure which is crucial in resolving documentary disputes in world trade finance related instruments.

The latest edition of the ICC Rules of Arbitration became effective on 1 January 2021, whilst the latest edition of the ICC Rules of Mediation were effective as of 2014. The International Court of Arbitration, which unlike its name does not operate like a national court, is the responsible ICC body for the administration of arbitral proceedings, whereas the International Centre for ADR administers mediation proceedings. The aforementioned governing bodies have well-established rules and procedures.  However, parties enjoy substantial leeway to determine several aspects of their own proceedings in line with the principle of flexibility for arbitral proceedings.

These rules were drafted by dispute resolution specialists and users from a diverse range of legal traditions and cultures, thus providing a modern and universally relevant framework for the conduct of dispute resolution procedures.

Benefits of Alternative Dispute Resolution

Costs and Accessibility

There are some obvious advantages for parties to elect ADR in comparison to litigation. Firstly, the costs involved in ADR tend to be considerably lower than those associated with court proceedings when compared to the sequence of costs from lower to the highest appeal courts, although arbitration has been criticized for increased expenses comparable to litigation in recent times. Lowers costs, if achievable through procedures such as expedited proceedings or through agreement or control on manageable disclosure processes, is certainly advantageous to any party involved in a dispute. This can provide particular benefits when a power imbalance exists between the parties. Arbitration has become more popular in areas where it was deemed previously to be inappropriate or a matter was ‘inarbitrable’ such as employment disputes, sports arbitration, intellectual property and finance disputes. ADR has ‘crept in’ to new areas as a preferred or optional additional means of resolving disputes. In this sense, ADR may be useful in increasing access to justice for all parties in dispute, in that parties that may have been deterred by the costs of litigation can still raise their dispute through ADR.

Time Efficiency

Generally, ADR should be more time-efficient than taking a matter to court. The speediness of ADR proceedings can have particular benefit where the length of a court proceeding would severely delay a related matter. This is particularly true in arbitration, when the parties agree that Article 30 of the ICC Rules, Expedited Procedure, shall take precedence over any contrary terms of the arbitration agreement. Many arbitral rules are designed to impose timelines, and arbitral tribunals are encouraged to monitor and avoid unnecessary delays. However, extensions of time and delays to issuance of awards can occur, although there are now sanctions and financial penalties on fees for arbitrators who unnecessarily delay an award.

Flexibility

Parties may specify their own terms in the arbitration agreement regarding how the ADR process is to be conducted and it is possible to agree that an arbitration proceeding is ‘ad hoc’, that is the rules are designed by the parties with the appointed arbitral tribunal and there is normally no institutional supervision of the process. This may include procedural and discovery rules, any relevant industry standards, applicable law, language of proceedings, time limitations etc.

Parties may also choose an arbitrator who is an expert on the relevant subject matter at hand, which can be beneficial in circumstances that require expertise and specific knowledge.

The flexibility of an ADR procedure allows parties to focus on issues which matter to them, as opposed to their strict legal rights and obligations.

Privacy and Confidentiality

ADR offers parties the opportunity to conduct a more confidential and private dispute resolution than that of a court proceeding, although some jurisdictions differ on the scope offered to participants. Litigation judgments are often released to the public, and may even gain some press or media coverage depending on the parties involved and the dispute. In saying this, the practice of releasing arbitral decisions is now more commonplace, but often with the names of parties and sensitive commercial data redacted. There is encouragement to produce a body of ‘law’ or arbitral decisions to be guiding precedents for arbitral tribunals in similar matters.  The availability of confidentiality and privacy for dispute resolution can be attractive to companies involved in disputes which are mindful of public knowledge of the details of the dispute and hope to mitigate potential reputational damage. It may also assist with preservation of relationships between parties even after a dispute process.

Control over the Process

Generally, parties engaged in ADR processes should have greater satisfaction in the outcome as opposed to bringing the matter through the court system. This may be attributable to the fact that in ADR, parties exercise greater control over the outcome and directly participate in constructing the terms of their settlement. Whilst perception of success is colored by the fact of the existence of a dispute, reputable global arbitration surveys conducted by the Queen Mary University of London do demonstrate that the preferred method of dispute resolution is international arbitration according to 90% of respondents.

Preservation of Relationships and Cultural Sensitivities

In general, ADR is also less confrontational than the traditional curial setting and can assist parties in maintaining and preserving existing relationships throughout a dispute. This is perceived as very important in Asian cultures although it is clearly important in other cultures too.

Neutrality

ADR can mitigate or eliminate perceptions of  any ‘home court advantage’ which a party may enjoy in court proceedings, where one party’s familiarity with the relevant laws and court procedures may offer strategic advantages or where there is a mistrust of a national legal system. It should be noted that during negotiations, the party with the strongest position may insist on at least having their country as the seat of the arbitration which would mean the national courts would be required for supervisory matters and the disposition of remedies.

Benefits of the ICC Arbitration and Mediation Framework

Specifically, the ICC Arbitration and Mediation Rules offer an institutional framework that assists the transparent, efficient and fair resolution of disputes between parties. The rules allow for flexibility in the dispute resolution process, giving parties the opportunity to exercise choice over many aspects of the procedure. The Rules were drafted and are amended in such a way that maintains relevance with modern frameworks of arbitration and mediation and responds to the needs of contemporary international trade. They are revised by teams of global experts, and there are extensive consultation procedures to ensure relevancy and progressiveness of practice.

Disadvantages of Alternative Dispute Resolution

Certainly, there are many benefits to resolving disputes through ADR rather than through ordinary litigation. However, this does not eliminate the fact that there are disadvantages to using ADR procedures.

Potential Inappropriateness of ADR

There are some circumstances where it is simply inappropriate to employ ADR as the dispute resolution tactic and traditional court proceedings are more expedient. It should be noted that it is the choice of the parties based on the ‘consent principle’ unless a matter is not arbitrable due to national laws or public policy.  Matters which have a strong public interest or have the potential to determine pivotal points of law may be reserved by a state for resolution solely by the courts and practitioners must always advise their clients of limitations when dispute clauses are being drafted. A drawback of ADR is that it does not necessarily involve evolution of points of law through the creation of precedent or judicially made law, and may be criticized as not possessing the capacity to improve legal systems through landmark decisions, although disclosure of case decisions has improved considerably over recent years.

Possibility of Inadequate Justice

In the case of mediation, ADR mechanisms may be primarily concerned with settling disputes in an efficient manner.  ADR has been subject to criticism for practices such as ‘splitting the baby’ – artificially dividing an award between the parties to avoid thorough analysis, and the use of lex mercatoria – a body of non-binding law, even if the parties did not contemplate such use. These topics are discussed extensively in academic circles, but for clients the concern is that justice could be overshadowed by theory and application of it, against the wishes of the parties. There are not many instances where this has been reported and the majority of decisions are not controversial. Investor state arbitration is often a focal point of criticism due to the stakes involved.  The mediation process in ADR is also subject to criticism for being less concerned with points of law; thus, the protection of parties’ legal rights is less of priority. However, the introduction of the Singapore Convention on Mediation which provides for recognition and enforcement of settlement agreements made further to mediation proceedings, has also improved the mediation landscape.

Mediators or arbitrators may not have the same legal proficiency as a judge, hence they may be less capable to resolve points concerning complex legal issues although they may be highly skilled at avoiding polarization and facilitating alignment on resolving issues.

Uncertainty

There is generally a lack of precedent in ADR. Hence, it tends to be difficult to predict the success of various issues. Certain tech companies now exist with arbitration case algorithm predictors. Cases with similar facts may lead to different outcomes, perhaps more so in ADR than in litigation although there is no conclusive empirical evidence on this point. Judicial proceedings, where courts are bound by statute or judicial precedent, may be more predictable, depending on the jurisdiction and the legal system.

The finality of decisions where arbitration is concerned is limited because there is generally no right of appeal. The appeal process in litigation can allow irregularities to be corrected without a re-trial or the narrower limitations in ADR.

Power Imbalance

While a power imbalance between parties may encourage the ‘weaker’ party to seek resolution of their dispute in the first place, power imbalances may also have a negative effect on the outcome of settlement in ADR. More specifically in terms of mediation, it is possible that the weaker party is pressured into reaching a settlement which is skewed towards the stronger party in fear of litigation if settlement is not successful. This challenge is exacerbated by the lack of checks on power imbalances between parties in ADR proceedings. In such a situation, court proceedings may be more appropriate since the court may, depending on the circumstances – such as consumer cases, take into account such differences between the parties in reaching a fair decision. In commercial cases, courts will generally not rebalance power due to freedom of contract principles.

Limited Remedies

While mediators and arbitrators can resolve matters that are civil in nature or which concern money, arbitrators need the assistance of the court to support the award of interim remedies and mediators may not be able to award any interim remedies. Many legal systems now support arbitral decisions for such issuance, but there can be an added layer of cost obtaining the arbitral order and then seeking leave of the court to enforce.

Applicable Law

It is recognized that parties may be reluctant to be subject to the laws of another party’s jurisdiction. As such, parties may choose to agree on the applicable rules of law. Conflict of law issues can arise between the governing law of a contract, the seat, the place or multiple places of enforcement and other systems of law and conventions which might affect obligations of the parties. Care should be taken to review conflicts of law very carefully at the point of entering into contracts and in preparing for a dispute.

Arbitration

Number of Arbitrators

The ICC court may appoint a sole arbitrator, notwithstanding that the arbitration agreement provides otherwise. In the alternative, the court may appoint three arbitrators if this is deemed to be appropriate in the circumstances.

There is a general rule that the arbitral tribunal should be odd in number. Some institutions have different appointment processes and these should be studied carefully.

Fees payable tend to be increased by the number of arbitrators and the Chair will normally receive the highest fees. As such, it is advisable for parties to stipulate in an arbitration clause how many arbitrators there will be, so as to reduce the cost of proceedings. It is also acceptable to rely upon the default position of the institution referenced in the agreement to arbitrate.

Proceedings

In an arbitration proceeding, parties are invited to present all their evidence and arguments for their case. Generally, parties will take turns presenting their case, similar to that in litigation. After all sides have been heard, the arbitrator will close the hearings and no further evidence or arguments will be accepted.

Award

The arbitrator’s decision, also known as the award, is final and tends not to be subject to appeal; however, an award may be set aside in extreme circumstances, such as in the case of fraud or severe legal irregularity on the part of the arbitral tribunal.

An award may also be made by consent of the parties where a settlement is reached after the case has been transmitted to the tribunal.

There are generally very limited grounds under which an arbitrator may be allowed to change his or her final award. In the case that an award is changed, it must be done within a very short time frame after the initial award was decided. Arbitrators are not permitted to reconsider the merits of issues which have already been decided upon; however, clerical, typographical or computational errors may be corrected.

Enforceability

While parties generally follow the arbitral award, the arbitrator does not in fact have the authority to enforce or compel parties to act in accordance with it.

That being said, arbitral awards are enforceable in court in legal systems which are signatories to the New York Convention of which there are 168 as of 1 May 2021, and a non-complying party may be forced to abide by the award if ordered to do so. This applies unless the contract between parties provides otherwise.

Recent Amendments to the ICC Arbitration Rules

The newly amended ICC Arbitration Rules came into force in the beginning of 2021 with the aim to increase flexibility, efficiency and transparency of ICC arbitrations, as well as to reflect established court practices.

The various amendments include additional flexibility for complex arbitrations, with Article 7(5) allowing for joinder of additional parties subsequent to the confirmation or appointment of an arbitrator, along with Article 10(b) providing that cases involving different parties may be consolidated where the same arbitration agreements are being relied upon.

The amendments further aim to preserve equality between parties, with Article 12(9) empowering the Court to appoint members of the arbitral tribunal where the method of constitution set out in the applicable arbitration agreement poses or may pose a risk to the validity of the award.

The amendments place high importance on the independence and impartiality of arbitrators. Article 17(2) permits the arbitral tribunal to take any measure necessary to avoid conflicts of interest. This Article has been amended with the goal of eliminating conflicts of interest of an arbitrator arising from a change in party representation.

The seat administering the dispute tends to be important where a contract governs relationships between two contracting parties from different jurisdictions, as parties may prefer a neutral seat of tribunal. The neutrality of the arbitral tribunal is ensured in light of the newly amended Article 13(6) which provides that the arbitrator shall not have the same nationality of any party to the arbitration. This Article applies only to investment arbitrations based on a treaty. Despite this, parties may choose to agree on the place of arbitration through a stipulation in the arbitration clause.

In line with the ever-prevalent need to accommodate technology in legal proceedings, Articles 4 and 5 allow transmission of the Request for Arbitration and Answer to be via electronic means of communication. Moreover, Article 26(1) provides for the possibility for the arbitral tribunal to decide that hearings can be held remotely. This will only be possible after consulting with all parties.

Parties are further encouraged to consider settlement at all stages of the process, and to all or part of their dispute (Appendix IV(h)(i)) in an attempt to increase flexibility and efficiency.

Finally, the amendments recognize the need for increased transparency in the arbitration process. Appendices I and II detail transparency provisions relating to the competition and functioning of the court, while Appendix II, Article 5 states that reasons for court decisions must be provided on the request of any party.

The ICC Rules also provide for an expedited procedure (Article 30), which is a streamlined procedure with lower fees. Article 30 has been amended to expand the scope of its application. Previously, parties were subject to the expedited procedure only where the disputed amount did not exceed USD 2 million and if the arbitration agreement was entered into after 1 March 2017. In line with the recent amendments, arbitration agreements entered into on or after 1 January 2021 where the disputed amount does not exceed USD 3 million come under the Article 30 expedited procedure. Parties may choose to opt out of the expedited procedure by including a clause to this effect in their arbitration agreement, or reaching mutual agreement in this regard at any time thereafter. These rules may also apply if parties agree to opt in, regardless of the date on which the arbitration agreement was entered into, or the disputed amount.

Mediation

Mediation, which falls under the ICC Mediation Rules, is generally more flexible than arbitration and litigation. Its main objective is to achieve a negotiated settlement through the assistance of a neutral facilitator.

Under this process, a neutral third party (mediator) facilitates negotiations between the parties so as to achieve a mutually acceptable settlement. Significantly, the focus of mediation proceedings lies in assisting parties to find solutions which address their concerns, rather than determining the fault of parties or forcing either party to accept a particular decision.

Proceedings

The mediation process begins with an informal opening statement by the mediator, which lays out details regarding the mediation process and the roles of the parties. Thereafter, parties will deliver their respective opening statements which include a summary of the facts, issues at hand, as well as desired outcome.

The mediator will then proceed to facilitate negotiation between parties, with the aim of achieving incremental compromise from both parties towards settlement.

Private meetings may be conducted between the mediator and a single. These meetings, which are confidential, may be deemed appropriate for purposes of addressing issues which a party may not be comfortable with discussing or disclosing to the other party in open sessions.

Settlement Agreement

The mediation process generally concludes with a settlement agreement being reached between the parties, outlining the terms which the parties must comply with. Once signed, the agreement will be binding and enforceable in a court of law.

In this regard, mediation allows parties to have control over the outcome of the dispute resolution process, as they may choose to settle only if both parties are satisfied with the proposed terms.

A party may subsequently request for the settlement agreement to be amended by the mediator, provided that the other party is agreeable.

Concluding remarks

Ultimately, the traditional court process and ADR mechanisms address different concerns of parties in dispute. As such, contracting parties are advised to weigh the advantages and disadvantages at hand, before opting for the dispute resolution mechanism which best serves their needs.

On the one hand, ADR tends to offer lower costs, time-efficiency, flexibility, privacy and confidentiality, greater control over the dispute resolution process, as well as offering a less confrontational method of resolving the dispute. On the other hand, the traditional court process may be more appropriate, depending on the nature of the subject matter in dispute, as well as in situations where legal certainty is a priority.

Where ADR would be more suitable for the parties’ needs, frameworks such as the ICC Arbitration and Mediation Rules are invaluable tools for purposes of administering ADR processes in a manner that is effective and relevant to current international trade practices.

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