Partner Ioannis Alexopoulos and Associate Ryan Cable examine the significance of selecting particular arbitration rules in instances where there may be multiple parties or multiple contracts in dispute, in the November 2018 edition of the Journal of International Banking and Financial Law.
Ioannis and Ryan’s article was first published in the November 2018 edition of LexisNexis Butterworths Journal of International Banking and Financial Law. Please find a link to this here.
- Whilst it may be difficult to predict what types of dispute are more likely to arise under a contract, when drafting a dispute resolution clause, it can be useful to consider the most appropriate dispute resolution mechanism for achieving a timely and cost-efficient resolution of a dispute particularly where multiple parties or multiple contracts are likely to be involved.
- Arbitration rules differ slightly. Having consideration for the most likely type(s) of dispute which may arise under a contract can be helpful when drafting a dispute resolution clause.
- Contracts involving multiple parties which refer disputes to arbitration can cause issues with respect to the mechanism for appointment of the arbitral tribunal. Similarly, disputes concerning multiple, related contracts (which is common with facility agreements) will require consolidation if the parties wish to avoid multiple proceedings which can lead to potentially varied results.
Intro / abstract:
In this Article we explore the significance of selecting particular arbitration rules in instances where there may be multiple parties or multiple contracts in dispute. The difference between the leading institutional arbitration rules is explored with the Article concluding with some guidance on how best to draft arbitration clauses.
The significance of arbitration rules
Arbitration is a consensual dispute resolution mechanism whereby the parties are free to agree the process which will be applied to resolve a dispute between them. Arbitration can be agreed between the parties upon a dispute arising or before a dispute arises by being selected as the dispute resolution mechanism contained within a contract entered into by the parties. The parties can elect to have the arbitration conducted under a set of institutional arbitration rules. These institutional rules include the “household names” such as the London Court of International Arbitration (“LCIA“), the International Commercial Court (“ICC“), the Singapore International Arbitration Court (“SIAC“) and the Hong Kong International Arbitration Court (“HKIAC“). These rules tend to follow each other, rarely distinguishing themselves significantly.
Despite the apparent commonality of institutional rules, there are some nuances which may assist banks, financial institutions and their clients in avoiding the need to conduct multiple proceedings relating to the same issues and the costs associated with commencing and conducting several arbitrations. For instance, some rules arguably provide a more efficient and cost-effective management of multi-party and multi-contract disputes whereas others can be better suited to achieving a result in relatively less complex disputes such as debt claims.
What is a multi-party arbitration?
In arbitration, the phrase “multi-party” relates to the situation in which there are more than two parties to a contract. In such situations, the key issue which arises is the need to ensure that each of the parties, regardless of how many there are, receive equal treatment in the formation of the tribunal and throughout the arbitration. This issue of equal treatment can be critical during the enforcement of an award where the unsuccessful party (i.e. the losing party) may look to raise that the award is incapable of enforcement due to the unfairness of the tribunal appointment process. The leading arbitral institutions have attempted to address this issue by setting in place a ‘fair’ appointment process in instances where the parties cannot reach consensus on the appointment process. This issue is discussed further below.
The term ‘multi-party’ may also arise in claims against parties who are not a party to a contract in relation to the same or similar subject-matter. The issue of joining such third-parties to an arbitration is known as ‘joinder’ and is generally permitted provided that all parties (and the tribunal, if already appointed) agree.
It is generally common for two or more parties in a multi-party arbitration to have aligned interests (i.e., they both alleged a breach by the other party or parties is the cause of the loss they have suffered). Where this arises, those parties with a common interest (i.e., recovery of damages from the party in breach) may wish to “team up” and appoint an arbitrator. Where there is no clear-cut divide between the various parties, it may not be possible to break into “claimant” and “respondent” camps.
What is a multi-contract arbitration?
It is possible for disputes to arise which, although connected in some form due to their subject-matter, are in fact disputes under two or more separate arbitration agreements.
“Multi-contract” arbitration relates to instances where there are a number of contracts, potentially between different parties, which all have an interest or connection with the issues in dispute. For instance, where there is a chain of contracts (i.e., contracts entered into one after the other such as in insurance or the sale of goods). In the banking and finance realm, a common example of a multi-contract scenario is a facility agreement where loans may have been advanced under several essentially identical contracts.
The central issue where there are several disputes relating to the same subject matter is ensuring that there is a consistent approach taken with respect to the mechanism for dispute resolution. For instance, if some of the contracts provide for disputes to be resolved by litigation in a particular national court whilst others provide for arbitration, unless the various parties agree otherwise, multiple proceedings may be commenced with the risk of inconsistent judgments/awards being handed down.
Differences between the leading institutional rules
By selecting a certain set of arbitration rules in a dispute resolution clause, the parties essentially agree in advance to the tribunal having the power to, amongst other things, make certain decisions concerning the consolidation of disputes between the same parties. Similarly, some rules give the tribunal (or the arbitral institution if a tribunal has yet to be formed) the power to order that third parties be joined to the arbitration.
As mentioned above, given the significance with respect to the enforcement of an award, several institutional rules deal with the issue of addressing equal treatment concerning the appointment of the arbitral tribunal in multi-party disputes. For instance, the ICC Rules 2017 (Art 12) and the LCIA Rules 2014 (Art 8) both provide for situations where usually each party is entitled to nominate an arbitrator but there are more than two parties. In such instances, the ICC and LCIA rules both provide that if the parties cannot agree to a method for appointing the party-nominated tribunal members, the respective institution may appoint the tribunal, including the president of the tribunal.
Other rules follow the same approach by permitting the parties, if they are able to agree, to nominate a member of the tribunal. However, if agreement cannot be reached, the relevant arbitral institution has the power to appoint the tribunal: e.g., SIAC Rules 2016 (Art 9) and HKIAC Rules 2013 (Art 8(2)).
The London Chamber of Commerce and Industry, London’s largest independent networking and business support organisation, has recently launched a new arbitration service; the London Chamber of Arbitration (“LCA“). In what is the most recent arbitration rules in the market, the issue of appointing arbitrators in multi-party situations has been addressed. Art 13(4) of the LCA Rules follows the leading institutions in allowing the parties to agree between them who is to fall within the “Claimant camp” and who is in the “Respondent camp” with each group to appoint an arbitrator. If agreement cannot be reached, the Board of the LCA will appoint the tribunal.
With respect to the issue of “joinder” (i.e., the adding of a party to existing proceedings), slightly different approaches are taken with respect to joining to the proceedings a party who is not subject to the arbitration agreement. For instance, Art 22.1(viii) of the LCIA Rules 2014 provides that joinder may be granted by the tribunal upon consent by the applicant party and the third party even over an objection by one of the existing parties to the arbitration. The ICC Rules 2017 differ in that Art 7 provides that joinder may only take place before the tribunal has been constituted, unless all parties (including the third party) agree otherwise. The ICC’s ‘consent by all parties’ approach is more common across arbitral rules, reflecting the consensual nature of arbitration.
Arbitral institutions have considered the likelihood of parties wishing to consolidate proceedings in order to enjoy the costs and time efficiencies which can be lost in conducting several proceedings under multiple contracts. The ICC Rules (Art 10) provide that at the request of a party, the ICC Court may consolidate two or more pending arbitrations where any of three conditions are met: (i) the parties have agreed to consolidation; (ii) all of the claims in the arbitrations are made under the same arbitration agreement; or (iii) where the claims are made under more than one arbitration agreement, the same parties are involved with the disputes arising in connection with the same legal relationship and the ICC Court finds that the arbitration agreements are compatible.
Similarly, the LCIA Rules (Art 22.1 (ix; x)) permit the LCIA Court to approve the consolidation of arbitrations provided they are commenced under the same or a compatible arbitration agreement between the same parties and no tribunal has yet been appointed or, if a tribunal has been appointed, it is composed of the same arbitrators. The position is largely identical under the SIAC Rules (Rule 8) and HKIAC Rules (Art 28.1).
The recent rules released by the LCA also contain a consolidation procedure. Under Art 11, if the parties are already involved in an arbitration under the LCA Rules, the LCA Board may, at the request of a party, decide to consolidate the new claims with the pending proceedings. The Board may only do so after consulting with the parties and the tribunal appointed in the pending proceedings.
Where the parties and issues are otherwise identical, a streamlined procedure is available under some institutional rules whereby a single request for arbitration can be filed, effectively acting as an application for consolidation. Single requests for arbitration are permitted under the ICC Rules (Art 9), SIAC Rules (Art 6) and the Stockholm Chamber of Commerce (SCC) Rules (Art 14). The LCIA Rules do not provide for this procedure and can therefore make LCIA arbitration a potentially more expensive process in instances where related disputes under multiple contracts may arise. In such circumstances, a claimant will be exposed to the LCIA’s £1,750 filing fee for each request, in addition to administration fees and legal costs associated with drafting individual requests, followed by the costs associated with an application which would need to be made to the Tribunal to consolidate the proceedings. This interpretation of the LCIA Rules was confirmed by the English Commercial Court in December 2017 in the case of A v B  EWHC 3417 (Comm) (“A v B“).
The 2017 case of A v B concerned the sale of two consignments of crude oil under two separate contracts entered into in September and October 2015, both of which contained an LCIA arbitration clause. The seller claimed that the buyer failed to pay the price due under both contracts and commenced LCIA proceedings in September 2016 by filing a single Request for Arbitration and a single registration fee. In response, the buyer, among other things, challenged the validity of the seller’s Request for Arbitration under section 30 of the Arbitration Act 1996 and Art 23 of the LCIA Rules 2014 on the grounds that the Request for Arbitration failed to identify the particular dispute and the particular arbitration agreement to which the dispute related. The tribunal rejected the buyer’s challenge on the grounds that it was brought too late in the proceedings. The buyer commenced proceedings in the Commercial Court where it was held that the single Request for Arbitration made in connection with two separate contracts was invalid under the LCIA Rules 2014 and that the buyer had not lost the right to bring the challenge to the validity of the Request for Arbitration.
So, which rules are best?
For banks and finance parties, it really is a question of “horses for courses” having consideration for the type(s) of dispute(s) that could arise under the agreement, the number of parties that could be involved in a dispute and the likelihood of multiple contracts being in dispute. However, the difficulty is that it is not always possible to predict what disputes may arise in the future.
For instance, if the most likely dispute is a claim for debt recovery, the LCIA Rules may be preferred over the ICC Rules due to the procedural steps particular to the ICC Rules that may prolong an arbitration. For instance, the ICC Rules require the parties at an early stage to draft and agree “Terms of Reference” which establish the scope of the issues and the procedural timetable. This can be a time and costs intensive process. At the closing end of the process, the ICC Rules require the award to be “scrutinised” by the ICC Court prior to its release to the parties. In any event, Art 31 of the ICC Rules requires the award to be issued within six-months of the hearing. In contrast, the LCIA Rules do not require scrutiny of awards by the LCIA Court. However, whilst the LCIA Rules do not place a deadline for issuing an award, Art 15.10 provides that LCIA tribunals are to seek to make their final award “as soon as reasonably possible following the last submission from the parties” and in accordance with any timetable notified to the parties and the LCIA Registrar.
It is important to note that if you are unable to get each of the potential parties to a dispute to agree a uniform arbitration clause (or at least compatible arbitration clauses), there will be a risk that parallel arbitration proceedings (or litigation) will arise which could lead to different results being reached in each separate proceedings.
An additional factor relevant to banks and financial institutions is the availability of summary procedures under some arbitral rules. Depending on the types of contracts being entered, and therefore the potential disputes which may arise, banks and financial institutions could be said to traditionally prefer litigation due to the availability of obtaining summary judgment in the event that there is a claim (or defence) which is manifestly without legal merit. Summary judgment thereby presents an opportunity to “knock the dispute on the head” at an early stage without incurring the costs and time of proceeding through the whole dispute resolution process. Summary procedures are presently only available under the SIAC Rules (r 29.1a) and the SCC Rules (Art 39) though are likely to be introduced by further institutions in future rule revisions. For instance, in December 2017, the ICC published a revised practice note providing guidance on the procedure for determining applications for summary dismissal of unmeritorious claims and defences under the ICC Rules to address the present absence of a summary dismissal process under its current 2017 rules.
Drafting arbitration clauses
As discussed above, most arbitral rules contain provisions dealing with the issues surrounding multi-party and multi-contract disputes. However, where such disputes are likely to arise, the best course of action to achieve the most timely and cost-effective arbitration possible is to ensure that the dispute resolution clause within the contract is drafted appropriately (i.e., it provides a clear, consistent and workable dispute resolution mechanism).
Where multi-party or multi-contract disputes are likely to arise, a concise dispute resolution clause may be difficult to achieve. For instance, the parties may agree arbitration clauses which permit all related disputes arising between them to be heard together in one arbitration. Alternatively, the parties may agree to having disputes dealt with in separate arbitration proceedings with the option to agree to consolidate those proceedings or to conduct concurrent hearings. Most institutional rules provide for “joinder” but none provide for “intervention”. If parties wish to allow consolidation where the rules they have selected do not contain the option, it needs to be drafted into the arbitration agreement.
The central issue with such arbitration clauses is being sufficiently clear as to who will have the power to determine whether a dispute is related to another. It is common for parties to grant this power to the tribunal (if one is already appointed). Alternatively, one party may be given the power or agreement by the parties must be reached, failing which, the disputes will be dealt with in separate arbitrations.
Where possible, an arbitration clause in related contracts should be identical, or at least similar or compatible. An alternative is to put in place an umbrella arbitration agreement whereby an overarching agreement provides an arbitration process for disputes arising out of subordinate agreements. This can reduce the difficulties of having parties agree to consolidate proceedings once a dispute has arisen or proceedings have been commenced. However, it should be kept in mind that an umbrella agreement may later work against a party where they would prefer to avoid being pulled into multi-party proceedings.