Policing arbitration – can accountability deficit be addressed?
By Natalia Chumak and Nick Storrs
Over recent decades, arbitration for dispute resolution has become increasingly popular. Commercial parties are becoming far more amenable to resolving their differences by private means rather than through national court systems, which can be more costly and time-intensive. There is, of course, nothing wrong in engaging in a private, consensual process and there are numerous advantages of doing so. But the framework within which such disputes are resolved must be unimpeachably robust in order to meet the objective in any dispute resolution process: to do justice between the parties in accordance with the law. Accordingly parties’ autonomous right to submit disputes to arbitration needs to be structured within a legislative framework which governs and regulates the arbitral process. This is in part to:
(i) oversee that process to ensure fairness and equality; and
(ii) ensure that justice is done and the law applied properly.
So to what extent does the current framework provide that oversight and does it ensure the irreproachability of arbitral decision-making?
The benefits of party autonomy in private dispute resolution are well understood by practitioners and commercial parties. Disputes are often resolved in a neutral forum, away from the risks of partisan decision-making based on unconscious bias. Of course, one would hope that all courtroom judges would dispense justice with professionalism and integrity, but as most practitioners know, that cannot always be guaranteed; so one can understand the presentational desire to have disputes heard neutrally. Finality is also often cited as a favourable feature of arbitration. Commercial parties wish to conduct their business. They do not want to be tied up in years of litigation. Swift and efficient dispute resolution is therefore attractive. With that efficiency comes cost efficiencies too, and the arbitral process is often cited as being more cost-efficient than court-based litigation. Whether that is in practice the case is a question which is doubtless open for debate, but it is at the very least a consideration. Confidentiality is also important. Commercial parties do not necessarily want their dirty laundry aired in public, and arbitration provides a confidential framework in which to resolve these disputes. Finally, enforceability. The New York Convention, which has been acceded to by over 150 state parties, has created a simple and efficient mechanism for the international recognition and enforcement of arbitral awards. There is a much greater readiness on the part of national courts to enforce arbitral awards than court judgments.
These are all obvious benefits to commercial parties who have the misfortune of finding themselves involved in a dispute. No commercial party wants or needs the distraction of litigation, which can tie up resources (both human and financial) for significant periods of time. But equally, no commercial party would want to resolve their disputes in a forum where the integrity and robustness of the process cannot be guaranteed. An essential ingredient in any dispute resolution mechanism is that the procedure achieves a legally fair result.
This is, of course, also important from a broader perspective. There is undoubtedly a correlation between the integrity of decision making at a judicial level and wider economic stability and prosperity. No commercial party wishes to do business in an environment where conflicts cannot be resolved fairly, whether through the courts or otherwise. When it comes to arbitration, that broader economic impact is, on one view at least, less severe: parties are able to define upfront the rules by which the dispute is to be played out, and so can hardly complain about the result. But to stop there would be naive. It is all very well parties defining in advance how a dispute is to be arbitrated, but if further down the line, when a dispute arises, a tribunal fails to apply the law correctly or makes its decision without proper regard to the facts, then the parties (or at least one side) will be understandably aggrieved. So the integrity of arbitral decision making is just as important as that of the courts, and needs to be regulated accordingly.
In most jurisdictions judicial accountability is achieved through a system of appeal. Through the appeal courts, a party is able to have a decision reviewed and tested. Thus decisions from the lower courts are monitored, with a view to ensuring the consistent and proper application of the law.
However, arbitration is different. Under most institutional arbitral rules, rights to appeal are limited and in some cases excluded. Cases of a serious irregularity or absence of jurisdiction may expose an award to challenge, but the incorrect application of the law or factual error, however wrong, is unlikely to do so. The overall effect is that in most jurisdictions, a tribunal’s decision will rarely be open to scrutiny.
While it is tempting to conclude that this is a positive feature of the arbitral process and in keeping with the theoretical commercial advantages of using arbitration, you cannot help but think that the absence of proper scrutiny may have an effect on the correct application of the law in what can be very significant disputes. This is not just a question of lazy tribunals, although seasoned practitioners will undoubtedly have come across them in their years of practice, it is also a question of competence. One often sees civil lawyers making determinations under a common law legal system and vice-versa. The potential for misconstruing and/or misunderstanding the law in those circumstances must be high. But in both situations, whether it be laziness or incompetence, those decisions are at risk of being poorly decided without an ability to have the decision reviewed.
There is in that sense a risk of injustice, and for those who believe in the universal application of law, then the arbitral process may present somewhat of an unappealing approximation to what should always be a right result. It follows that the integrity of arbitration as a dispute resolution mechanism relies entirely on the quality of the decision-making. Those commercial parties who have subscribed to arbitration, are at the mercy of the arbitrators who, in the absence of an open appeal system, are largely unaccountable.
If you accept that hypothesis, then is there something better? Well, there are two possibilities. First, the standard for an appeal in arbitral proceedings could be lowered, even to the standard in judicial appeals. There seems to be no good reason why they are different. Or, arbitral institutions could introduce an appellate jurisdiction within their own rules. That would at the very least provide a degree of oversight. Either way, as arbitration becomes more popular, and the size of the disputes gets bigger, it seems very much in the interests of justice, and maintaining the integrity of the arbitral process, that the decision-making of those chosen to arbitrate disputes is properly policed.
Natalia Chumak is a partner and Nick Storrs a senior associate at Signature Litigation, a specialised firm that focuses on regulatory investigations, commercial litigation and arbitration. The firm often handles complex multi-party disputes stretching across multiple jurisdictions.
This article was originally published in Legal Business Disputes Yearbook 2015 and can be found here.