Choice of Arbitration Rules
The Dilemma of an African Adviser
copy @ Lex Mercatoria
Perhaps the most important single consideration in making a choice between the available Rules is the costs. What would the adoption of the particular set of Rules cost? This may be a hypothetical question at the time of making the contract; for a dispute may never arise. It is, however, necessary to assume the worst and to safeguard against it, if possible. As stated earlier, the non-administered arbitration carries no administration costs. Even that type involves some costs: the fees of the arbitrator(s); the fees of lawyers and agents, the cost of facilities, such as rooms for the arbitration, secretarial services, translation, if any. If the arbitration takes place in another country, transportation and hotel accommodation for the parties, their teams and witnesses must be considered. Some of these costs could be eliminated under certain Rules. For example, ICSID because of its connection with the World Bank, and the WIPO Arbitration Center, because of its connection with WIPO, and because of the nature of their respective jurisdictions, make facilities available to the parties which parties would not otherwise get under other arbitral procedures. Craig, Park & Paulsson (2nd ed.) at page 39 state that, "for large cases, ICSID arbitration is probably less expensive than ICC arbitration, primarily because the parties stand to benefit from the World Bank's infrastructure, and because arbitrators' fees are calculated on a per day basis." [emphasis supplied] The emphasis is here given because the view is taken by the authors in another context that the charge of fees on a time basis is not necessarily better than the percentage of the amount-in-dispute basis used by the ICC.
Venue by itself is not such an important factor for determining the question of choice from the various recognised Rules, because each of the institutions as well as UNCITRAL says that proceedings could be taken under its Rules anywhere in the world. The venue has importance when considering the arbitral environment in which proceedings under whichever set of Rules chosen can be taken. Above all the venue has relevance when considering the impact that the arbitration law of the jurisdiction would have on the procedures of the Tribunal; the degree of control or powers of intervention which the courts of the jurisdiction would have; the judicial assistance they could give by way of interim relief and otherwise, the appellate or review powers over awards and the enforcement of the award etc. The comment in the LCIA Worldwide Arbitration Newsletter Vol. 1 No.2 of October 1996 on the English Arbitration Act is in this respect of interest. It says:
"A major criticism of London arbitration continues to be the access to the court for review. The right to challenge an award used to be based on the ground of 'misconduct' and has given rise to many applications based on the procedure used in an arbitration. Challenge now has to be made on the ground of 'serious irregularity' which should have the effect of reducing the number of applications (section 68).
Although the rights of review and appeal from the Tribunal's award have been severely limited, they have not been eliminated entirely by the English legislation. But as stated earlier, the substantive law of the venue on arbitration, does not make that much difference to the choice of any of the recognised Rules for regulating the arbitration. The differences in the Rules on venue may, however, be of interest, because of the different answers they give to the question regarding the choice of the place where the arbitration should be held, if the parties themselves were to fail to name a venue. The UNCITRAL Rules in the event of default by the parties leave the choice of the place of arbitration to the Tribunal, having regard to the circumstances of the arbitration. But the Tribunal is given power to hear witnesses and hold meetings and consultation among its members at any place the Tribunal deems appropriate. The ICC Rules leave it to the ICC Court if the parties fail to agree. No reference is made to the Court having regard to the circumstances or the exigencies of the situation which would lead it to select one place rather than the other. Nor do the ICC Rules contain provisions similar to the UNCITRAL provisions on the discretion of the Tribunal to hold hearings, consultations and inspections somewhere else. The LCIA Rules specifically name London as the place of arbitration in the absence of a choice by the parties, unless the Tribunal determines that in view of all the circumstances, and after having given the parties an opportunity to make comments in writing, that another place is more appropriate. This formulation of the Rules gives power apparently to the Tribunal to overrule the choice of the parties. Under the proposed new LCIA Rules, the Tribunal is to be substituted by the Court. The commentary on the draft explains that the proposed formulation "eliminates the curious possibility that arbitrators who were named for a particular place of arbitration can decide to go elsewhere." The LCIA Rules also explicitly allow the Tribunal to hold hearings and meetings elsewhere. Both the ICC and LCIA Rules provide that the award shall be deemed to have been made in the place of arbitration.
The point made here is that in a default situation the parties are at the mercy of the Tribunal, in the case of an arbitration under the UNCITRAL Rules; at the mercy of the Court in the case of the ICC Rules; and when the new LCIA Rules come into force, the parties must come to London, unless the Court decides otherwise. The determination of the place of arbitration also has an impact on the costs and convenience of access of the parties. In an article I wrote in Arbitration International (Vol. 8 No.2, 1992 at page 167) on "The ACP/EEC Conciliation and Arbitration Rules", I raised the issue of the concern of ACP States over the logistical disadvantage they suffer in arbitrations with their EU treaty-partners held in Europe. The comparative costs of transportation of advisers and witnesses, the transmission of documents, stay at hotels, communications, especially the seeking of instructions, between arbitral venue and the home-base, all put the ACP parties at a disadvantage. From that point of view, in the present context, the question arises whether London, Paris, Geneva or New York is the most convenient or cost-effective place for an arbitration between an African party and a party from outside the continent. With the development of intra-African trade, the question could be further refined into whether any of these venues should be used for arbitrations between parties resident in Africa. At the last LCIA Pan-African Council Conference in Nairobi in December 1994, Jan Paulsson gave the 7 Freedoms the absence of which continue to make Africa an unattractive destination for international arbitration as the freedom:
"1. to choose arbitration as the method of dispute resolution; because leaving a discretion in the hands of the courts whether to enforce an international agreement to arbitrate is not acceptable;
2. to be represented at the arbitration proceedings by counsel of one's choice;
3. to stipulate the language or languages to be used in the arbitration proceedings;
4. to have the dispute decided by arbitrators selected by the parties;
5. to have the arbitration proceedings conducted in the manner agreed between the parties;
6. to have the dispute determined according to whichever law or other basis is chosen by the parties;
7. to secure an award which is final and binding and not subject to review or amendment by another body."
With the development of centres for arbitration in Cairo and Harare and the adoption of clones of the UNCITRAL Model Law by Nigeria, Egypt, Kenya and Zimbabwe, and now with the possibility of South Africa joining the group, the answer to the question whether at least intra-African arbitrations should be held outside Africa, should increasingly become weighted towards the negative. The development deserves all encouragement from this Conference.
The non-administered arbitration is supposed to avoid institutional fees. But as pointed out by Craig, Park & Paulsson (2nd ed. at page 39) "ad hoc proceedings arranged outside an institutional framework often turn out to be frighteningly expensive. The parties think they avoid administrative expenses, but in point of fact the tribunal they set up must create its own sui generis administration." Whatever the effective position, if even administrative costs are avoided, under the UNCITRAL Rules, (Art.38(f)), "fees and expenses of the appointing authority as well as the expenses of the Secretary General of the Permanent Court of Arbitration at the Hague" if any, would have to be paid by the parties.
Institutions like the ICC and LCIA charge for the cost of administration. Their approaches to the calculation of these costs are different. Apart from what it describes as administrative costs, the LCIA charges a registration fee, presently set at £1,000 which is non-refundable. No such charge is made by the ICC. While the ICC bases its administration charges on the amount in dispute, the LCIA, and indeed the AAA, base theirs on the time spent on the administration. This makes comparison difficult, and the comparison is rendered even more complicated by the fact that the currencies in which the institutions charge are different, the ICC, the AAA and the WIPO Center charging in US dollars while the LCIA's charges are in pounds sterling. It is, however, not impossible to imagine scenarios in which one approach would result in much higher costs than the other. According to the ICC Scale of Administrative Expenses, the amounts payable to cover costs for a few selected claim-amounts of, for example, $500,000, $1 million or $10 million, which are all modest sums by present day international commercial standards, but nevertheless still quite substantial by African standards, are as follows (with the expense figure in brackets against each claim figure): for a claim for $500,000 ($9,500); for $1 million ($14,500); $10 million ($30,500). On any amount above $10 million up to $80 million, the expenses amount to $30,500 plus 0.05% of the amount exceeding $10 million. On any amount over $80 million the expense fee is a flat $65,500. To arrive at the figure for the amount involved in the dispute, the claim amount is added to the amount of the counter-claim, unless the ICC Court takes the view that the counter-claim amount is so disproportionate to that of the claim that different charges ought to be set for the respective claims. The approach of a percentage charge based on the amount in dispute gives no recognition to the degree of complexity of the work involved in the particular case.
Apart from the flat non-refundable registration charge of £1,000, the LCIA's administrative charges, on the other hand, are calculated on the basis of time actually spent, with a charge of £150 per hour for the time of the Registrar or Deputy-Registrar, and £75 per hour for that of the Secretariat. Where the administrative services rendered in connection with an arbitration are not time-intensive, this method of calculation must be more cost-effective.
With regard to the fees of the Tribunal, in the case of an ad hoc proceeding, the arbitrator(s) would have to negotiate their entitlement with the parties. If the proceedings are under the UNCITRAL Rules, the Tribunal in fixing its fees is obliged to take into account any schedule of fees which has been issued by an agreed or designated appointing authority "to the extent that [the Tribunal] considers appropriate in the circumstances of the case". If the appointing authority has not issued a schedule of fees in international cases, a party may request the authority to furnish a statement setting out a basis for the establishment of fees which is customarily followed in international cases in which the authority appoints arbitrators. If so furnished, the Tribunal is obliged to take the statement into account "to the extent that it considers appropriate in the circumstances of the case." In these cases, when a party requests and the appointing authority consents to perform the function, the Tribunal must fix its fees after consultation with the appointing authority, which is entitled to make any comments it deems appropriate to the Tribunal.
The fees of the arbitrators under the ICC Rules are charged according to the amount in dispute; the Scale of Fees specifying a minimum and maximum figures within which the Court would fix the arbitrator(s) fees. Taking the same figures in dispute as for the administrative expenses, the fees for an arbitrator are, for $500,000 (minimum of $5,950 and maximum of $32,500); for $1 million (minimum: $8,450; maximum: $47,500); for $10 million (minimum: $22,450 and maximum: $121,500). The fees progress on a diminishing percentage basis as the amount in dispute increases. Craig, Park & Paulsson (2nd ed., at pages 40 - 41) refer to the potential windfall receipts inherent in this system for lawyers, giving as an example, a large case which was settled some years ago, before any issue had been argued, but after a day-long meeting to draft the Terms of Reference. "Even after partial refund of the deposit, each arbitrator was given a fee of some $40,000." As the learned authors commented, "This kind of jackpot approach has no place in international commercial arbitration, it corresponds more to the image of the occasionally lucky business 'finder' than to that of a reputable profession." I cannot say that this situation can never occur again. If it cannot, the mechanisms put in place to prevent such recurrence would be of interest.
The LCIA calculates the fees of the arbitrators according to the hours spent by them on the arbitration. According to the Schedule of Costs effective from 1 June 1996, the fee rates must be within the following bands: Time for meetings or hearings: £600-£2,000 per full working day. Other time spent on the arbitration: £100-£250 per hour. In exceptional cases, the rates may be higher or lower if agreed expressly by all parties. Neither the LCIA nor the ICC permits private agreements between any nominee or arbitrator and his nominator for the fixing or payment of fees or expenses. In practice, the LCIA sets arbitrator(s)'fees according to the rates of the selected arbitrators. With a view to greater control over the cost-element, the proposed LCIA Rules suggest that the provisions on the constitution of the Tribunal should include in addition the following: "If the parties have agreed that they are to nominate arbitrators, or a third party to nominate an arbitrator, such arbitrator or arbitrators shall be appointed subject to their agreement upon fee rates proposed by the Registrar in conformity with the Schedule of Costs." (see Art.5.3) The commentary to this change, points out that: "The LCIA strives to give users a cost-effective solution. Occasionally it has been impeded by arbitrators demanding egregiously high fees. The added phrase in Article 5.3 is designed to assist in dealing with such situations." The current Article 18 places the responsibility for the computation of costs on the Tribunal. The proposed new Rules transfers this responsibility to the Court. The commentary on this amendment (to be found in the new Art. 24) says that its intention is to ?remove arbitrators' power to fix their own fees. There have been occasional difficulties in this respect. Better practices (record-keeping, prior understandings) should follow automatically when arbitrators realise they must convince the Registrar.'
The various Rules import the adoption of different methods for ensuring the payment of the costs by the parties to the arbitration. UNCITRAL arbitrators and other non-administered Tribunals have to organise their own system of deposits for securing payment. The institutional costs-structure covers the administrative costs and the costs of the Tribunal. Under the ICC Rules, each request to open an arbitration must be accompanied by an advance payment of US$2,000 on the administrative expenses. This payment is not recoverable and becomes the property of the ICC, and is credited to the portion of the administrative expenses payable by the party. No request for arbitration will be entertained unless accompanied by the appropriate payment. The Court has power to set different costs figures for the parties. This may happen, for example, where there is a counter-claim by the defendant which is higher than the claim. The Court, having set the figures will request each of the parties to pay an amount corresponding to 25% of the total estimated costs in advance, amounting to 50% of these costs in equal shares. Before July 1986, although the Court had power to request the payment of a portion of the costs as advance, in practice, it requested payment of the whole amount, i.e., each of two parties paying 50% of the costs, or in default by the respondent, the claimant paying the total amount, before the arbitration could proceed. Since then, the introduction of the system of ?staggered' payments means that the initial advance has been reduced to 25% in cash. From that same date, bank guarantees have been acceptable to the Court, but now only when one party has fully paid 50% or a minimum of $300,000 in cash as advance on the costs. The ICC Secretariat will, therefore, not accept an offer of a guarantee either to make up the default of the other party on its initial 25%, nor to secure the remaining 50% if each party paid its required 25% share at the outset. The problem created by the new procedure is described by Craig, Park & Paulsson in their 2nd edition of their book at page 249 as follows:
"Under the prior system, the claimant was in greater control of the progress of the arbitral proceedings. Having initiated arbitral proceedings by filing a Request for Arbitration, the claimant could, by then paying in 50% of the entire advance as soon as the amount was fixed by the Court of Arbitration, assure that the proceedings would advance, and that the file would be transmitted rapidly to the arbitrators.
Under the present procedure, the need to wait for payment by the defendant, (or notice that the defendant will not comply with his payment obligation), introduces an element of uncertainty and delay. Weeks or months may go by before the situation is resolved. During this time the file remains with the ICC Secretariat,"
The passage was written before the January 1993 changes introduced the $300,000 minimum advance payment. It should be mentioned that all the initial advance payment of a portion of the estimated costs does is to move the arbitration to the stage of the preparation of the Terms of Reference. After that, there will be no further movement until the entire amount of the estimated costs has been paid in.
Under the LCIA Rules, on the other hand, the Tribunal may order the parties to deposit with the LCIA an amount sufficient to cover the Tribunal's fees and expenses and the LCIA administrative costs for the next stage of the arbitration. The time limit for the staged deposits will vary with the circumstances, but meetings and hearings will not commence if the amount ordered has not been deposited.
The LCIA makes the point that a separate account is opened for each arbitration. Moneys deposited are placed in a special deposit account and the interest accruing remains with the account and is credited to the amount deposited by the parties. Similarly the WIPO Arbitration Center's services make it clear that "Interest accruing on deposits administered by the Center is credited to the parties." This is not the course adopted by the ICC. Craig, Park and Paulsson on ICC Arbitration (1st ed) made the point in paragraph 3.03 that:
"interests from deposits made by parties are not credited to them - a practice difficult to justify - and have become an important source of revenue for the ICC. As a result, parties to ICC arbitration subsidize ICC operations which have nothing to do with arbitration. Or to put it another way, profits of ICC arbitration are not used for the sole purpose of upgrading arbitration services."
The 2nd edition of the book waters down the criticism considerably, and in the true audi alteram partem spirit puts forward the justification for the approach given by the ICC. The case of the ICC basically being that the administrative costs charged are not sufficient in themselves to cover the ICC's costs, and that far from the arbitration process involving a limited number of people with files in the office, it is linked to the ICC as a whole, in the performance of its diverse functions. The fact remains that other institutions manage to do without the retention of the interest on the deposits, which in the case of the ICC amounts to a very considerable sum.