13 February, 2016
Henderson Alastair and Emmanuel Chua of Herbert Smith Freehills LLP delivered an evening talk on the 8th of October 2015 at the KLRCA titled, ‘May the Odds Be ever In Your favour – Selecting the most appropriate dispute resolution forum for outbound investments’. This article is derived from their 8th October 2015 presentation.
Introduction
As little as 25 years ago, dispute resolution in asia typically meant litigation in domestic courts, with choice of jurisdiction often representing the only meaningful variable. in contrast, parties today are presented with a larger array of options spanning from mediation to expert determination; review boards to arbitration and international commercial litigation.
Whilst increase in choice is welcome, it becomes even more important for parties to properly consider and understand the pros and cons of dispute resolution mechanisms in the context of their commercial goals. this is often easier said than done – in the eagerness to get the deal done, dispute resolution clauses often end up as an afterthought to the primary commercial and legal aspects of a transaction. even where one party has reservations about the dispute resolution provision in question, there is often commercial pressure to close an eye to a clause that, in most circumstances, will not be used. However, failure to properly consider the dispute resolution mechanism at an early stage can lead to severe problems if a dispute arises later.
We highlight in this article some of the benefits and limitations of the key dispute resolution options available to litigants today to emphasise the importance of careful selection of an appropriate dispute resolution forum.
Desirable features of a dispute resolution mechanism
Some of the key factors that international businesses look out for in deciding which dispute resolution mechanism to adopt include:
Cost: inevitably one of the most important factors in play. each dollar spent on dispute resolution equals to a dollar less for investment in the business. even where the chosen process allows for recovery of these costs, that recovery is (almost) never complete.
Fairness: Clearly, it is fundamentally important that disputes should be resolved in a process that is fair, transparent and impartial. the carefully-negotiated balance of rights and obligations in a contract may be rendered worthless if the decision-maker and the process are unreliable, unfair or corrupt.
Speed: a dispute that drags on for years not only means increased costs, it can also prolong uncertainty and drain significant time and resources that could have been put to better use.
Finality: Connected to the previous factors, a judgment or award that can be reopened or appealed at various levels will lead to further wastage of costs and time.
Familiarty/Certainty: it is important that parties are not “ambushed” by unfamiliar procedural rules or processes so they can prepare and present their cases effectively.
Confidientiality: this is a key factor in certain industries and in disputes involving sensitive subject matters such as trade secrets or alleged wrongdoing.
Specialist Expertise: especially important in specialist industries (e.g. construction or shipping), where having an arbiter well versed in the discipline can often translate into significant savings in time and costs.
Benefits and limitations of the main dispute resolution options available today
With these points in mind, we explore exactly how well the more popular dispute resolution options available today are suited to achieving the aims of international businesses.
I. Domestic Litigation
Domestic litigation was for a long time the default choice for dispute resolution. there is still much to commend about it in appropriate cases, in particular in countries where the courts are efficient and fair. Here, litigation may often be the quickest and cheapest form of formal dispute resolution, especially where both parties are based in that country, and a binding court judgment brings with it a valuable measure of certainty. Courts also have mechanisms to ensure that their judgments are complied with and, where assets are located within the jurisdiction, can issue appropriate orders to aid enforcement.
However, some courts have reputations for being less than fair or efficient, and their judgments may be subject to several levels of appeals. Where one of the parties is foreign, domestic litigation may not be the preferred choice due to lack of familiarity and (particularly) due to the relative weakness of international mechanisms for cross-border enforcement of court judgments.
II. Arbitration
Over the last two decades, arbitration has undoubtedly become the most popular alternative to litigation in many parts of the world. its buzzwords of speed, confidentiality and ease of enforcement have made it especially popular amongst international businesses.
Enforcement and finality are particular strengths. the New York Convention1, with 156 signatories, ensures (on paper and to a significant degree in practice) an ease of enforcement of arbitral awards across a significant number of jurisdictions that is not available to regular court judgments. there is no appeal or reconsideration of the decision unless the very limited grounds set out in the Convention are made out. parties are not bound by strict rules of procedure commonly found in national courts, and also have a say in the identity (and therefore expertise) of the arbitrator(s) that will determine the dispute.
These perceived advantages have led to the explosive growth of arbitration, notably in asia. for example, in 2014 more than 220 cases were filed with the KLRCA2, up from 156 cases in 2013 and less than 20 cases a decade earlier.3
However, arbitration is not perfect and users quite frequently report a less rosy picture. an arbitral tribunal’s relative lack of coercive powers and its fear of being accused of procedural unfairness leave the arbitral process prone to delay and dilatory tactics, translating to increased time and costs. in some regions (including parts of Southeast asia), scarcity of experienced arbitrators presents real problems in ensuring fair and efficient procedures. Joinder and consolidation are problematic issues insofar as an arbitration agreement can only bind the parties to it. as a result, arbitration may not be best suited to multi-party transactions or where issues involving third parties arise. even the oft-touted advantages of speed and efficiency do not always hold true – it is not uncommon for awards to be held up for months and even years4 at costs greater than an equivalent court action.5 indeed, it is now commonly accepted that international arbitration is typically more expensive than comparable court litigation.
As the Chief Justice of Singapore, Sundaresh menon, aptly put:
“arbitration, by its very nature, cannot provide a complete solution to propel the vessel of global commerce forward. Arbitration was conceived as an ad hoc, consensual, convenient and confidential method of resolving disputes. It was not designed to provide an authoritative and legitimate superstructure to facilitate global commerce. It cannot, on its own, adequately address such things as the harmonisation of substantive commercial laws,6 practices and ethics.”
III. International Commercial Litigation
Given these inherent limitations, the spotlight has more recently been cast on international commercial litigation. this essentially refers to litigation in a court that is “foreign” to one or both litigants, which has been specially created as an international forum for judicial resolution of commercial disputes.
The concept of “foreign” litigation first gained popularity with the english Commercial Court, whose jurisdiction was described by lord Denning as such:
“no-one who comes to these courts asking for justice should come in vain. This right to come here is not confined to englishmen. It extends to any friendly foreigner. He can seek the aid of our courts if he desires to do so. you may call this “forum shopping” if you please, but if the forum is England, it is a good place to shop in, both for the quality of the goods and the speed of service.”7
the Commercial Court today hears over 1,000 commercial disputes a year, with almost half these matters involving solely non-english litigants.8
Other institutions have more recently jumped on the international litigation bandwagon, including the Dubai International Financial Centre Courts (DIFC), the Qatar International Court and Dispute Resolution Centre (QICDRC) and, most recently, the Singapore International Commercial Court (SICC), which opened in 2015.
International commercial courts generally seek to combine the best features of international arbitration and domestic litigation. Common features include the ability to be represented by foreign counsel, flexible rules of procedure, the ability to apply for proceedings to be heard in confidence and an international panel of jurists who are specialists in their respective fields. Commercial courts have in addition the powers of traditional courts, and can therefore take steps to ensure compliance with their orders and judgments.
However, limitations remain, in particular the (current, relative) lack of cross-border enforceability of international commercial court judgments. in the absence of widely- adopted reciprocal enforcement treaties, a successful litigant would have to bring fresh proceedings to enforce a judgment in domestic courts where assets are based, adding another layer of time, cost and uncertainty.
The Hague Convention on Choice of Court agreements, which essentially seeks to be the equivalent of the New York Convention for national court judgments, seeks to provide a solution to this. However, whilst it entered into force on 1 october 2015, so far only the european union and mexico have ratified the Convention (Singapore and the united States having signed but not ratified), and it is therefore likely to be some time yet before national court judgments can enjoy the same ease of enforceability as arbitration. once the Hague Convention gains widespread applicability, however, it may become
a real game-changer in international dispute resolution.
Iv. Mediation and hybrid processes – A new paradigm?
Generally understood as a consensual process facilitated by a neutral third party, mediation is often the method of choice for attempts to reach an amicable settlement where direct negotiations have failed. remaining outside the formal dispute resolution processes has clear advantages in terms of time and cost, and can also help to preserve the parties’ commercial relationships.
On the other hand, unfamiliarity, the lack of a formal structure and lack of a guaranteed, definitive resolution can issuade parties from engaging in the process. Notwithstanding the implied duty of confidentiality in mediation, parties remain concerned that the process may expose weaknesses in their case to the counterparty. in certain cultures, parties are reluctant to propose mediation as it may be perceived as a concession of weakness in one’s position.
Partly as a response to these limitations, another recent development has been the promotion of hybrid processes that introduce mediation into more formal dispute resolution processes. prominent institutions including the ICC, CIETAC and HKIAC have introduced variations on the “med-arb” procedure in which mediation is used either as a precursor to arbitration or during the arbitration process. more recently, the Singapore International Mediation Centre (SIMC) has collaborated with the Singapore International Arbitration Centre (SIAC) to issue and administer an arb-med-arb protocol9, which may be summarised as follows:
(i) a party commences arbitration under the SIAC rules.
(ii) the arbitration is stayed following the filing of a response to the Notice of arbitration and the constitution of the tribunal.
(iii) the matter is transferred to the SIMC, which will fix a date for the mediation. the mediation will be conducted under the rules of the SIMC before a mediator who will not, as a general rule, be a member of the arbitral tribunal. unless extended, mediation will be completed within eight weeks of commencement.
(iv) if a resolution to part or all of their disputes is reached, the parties may formalise any settlement in the form of a consent award on the agreed terms of the settlement. a consent award is generally accepted as an arbitral award and is therefore enforceable in any of the New York Convention states.
(v) matters that remain unsettled may be referred to and resolved in the pending arbitration.
This process arguably provides the best of both worlds. parties can explore the possibility of having their disputes resolved via mediation whist retaining the option of proceeding to arbitration if it becomes necessary. any resultant settlement can be recorded as an arbitral award and enforced with the same ease.
Other options
Aside from the well-known triumvirate of litigation (domestic or international), arbitration and mediation, and hybrid processes combining these alternatives, the menu of dispute resolution options also offers more specialist processes such as adjudication (often used in construction cases), review boards (again in construction) and expert determination (typical in technical cases or in valuation or price/quality disputes). Space does not permit a longer discussion about these choices but in suitable specialist cases they can represent very effective alternatives. at the very least, their existence confirms the range and complexity of the options that have to be considered.
Some guiding principles as is clear from the above discussion, selecting an appropriate dispute resolution forum can be far from straightforward. each option comes with certain benefits and limitations that parties should bear in mind given the circumstances and context of the transaction that they intend to enter into.
One key consideration, for example, is the location of the counterparty’s assets. Where these are located in multiple jurisdictions or jurisdictions that do not have a reciprocal enforcement regime for court judgments, arbitration may be a more suitable forum for the purposes of eventual enforcement. parties may consider including a mandatory negotiation or mediation provision, particularly if the parties have a good relationship or long standing commercial arrangements (such as long- term oil and gas supply agreements). Where the matter is likely to require technical or specialist expertise, parties may even consider including submitting disputes to adjudication or expert determination.
Parties are therefore advised to apply their minds to the question of dispute resolution clauses at an early stage. too often, parties fail to do this only to find, when a dispute arises, that the dispute resolution provision in their agreement turns out to be wholly unsuitable. this invariably leads to further wasted time and costs and, ultimately, a very real risk that the aggrieved party will be unable to meaningfully exercise its contractual or other rights.
By Henderson Alastair & Emmanuel Chua, Herbert Smith Freehills LLP
1 Convention on the recognition and enforcement of foreign arbitral awards 1958.2 http://www.legalbusinessonline.com/ reports/arbitration-asia-next-generation.
2 http://www.legalbusinessonline.com/ reports/arbitration-asia-next-generation.
3 http://eng.viac.vn/about-us/case-statistic- from-different-arbitration-centres-a273.html.
4 for example, in PT Central Investindo v Wongso & Others [2014] SgHC 190 the arbitral tribunal had taken more than 18 months to render its award.
5 indeed, costs may be decidedly disproportionate to the amounts claimed. for example, in VV & Another v VW [2008] SgHC 11, SgD 3.5 million in legal fees was incurred defending a claim for SgD 590,000 and bringing an unsuccessful counterclaim.
6 opening lecture for the DifC Courts lecture Series, 2015.
7 The Atlantic Star [1973] Qb 364; [1972] 3 Wlr 746.
8 “Commercial Court: ahead of the game”, grania langdon-Down, law Society gazette, 29 September 2014 (accessed via http://www. lawgazette.co.uk/practice/commercial-court- ahead-of-the-game/5043604.fullarticle, 3 December 2015).
9 also known as the ama protocol: http://simc. com.sg/siac-simc-arb-med-arb-protocol/.
For further information, please contact:
Suganthy David, Kuala Lumpur Regional Centre for Arbitration
enquiry@klrca.org
