Arbitration is Cheaper – Myth or Reality?
Even for the most financially viable individuals and companies, costs will often inform a party’s choice of whether to initiate, defend, or compromise a claim and the strategy to be employed for doing so. At first blush, arbitration is frequently (and some might say mythically) viewed as a method of dispute resolution that is a faster and cheaper alternative to court litigation. But, as discussed below, when one considers the modern origins of domestic arbitration and international arbitration, the reality is more complex than that.
While the legal framework for arbitration in many jurisdictions and under the rules of many arbitral institutions encourages procedures to make arbitration more attractive, flexible, and cost effective, the costs of an arbitral process can often be high and are often determined by how the arbitral process is conducted.
With arbitration and the traditional court process respectively vying for recognition as a preferred mechanism for the resolution of disputes, this article will highlight how arbitration has evolved to adopt and promote tailor-made procedures to reduce the costs associated with an arbitral process and make comparisons, where appropriate, to the approach taken by the traditional court process.
The modern origins of international arbitration and the impact on efficiency and costs
While it is generally accepted that domestic arbitration emerged as a more efficient and cost-effective alternative to court litigation, the modern origins of international arbitration tell a different story. With the substantial growth of international trade and commerce in the twentieth century, international arbitration emerged as a preferred means of resolving cross-border commercial disputes primarily because (1) it provided for a neutral alternative to local courts for resolving disputes between parties of different nationalities and (2) the enhanced enforcement capabilities provided by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly referred to as the New York Convention) made arbitration more attractive than court litigation for cross-border disputes. It was these neutrality and enforcement factors that drove the development of international arbitration more so than considerations of efficiency and costs.
Moreover, many of the disputes that were resolved through international arbitration in the early years of its modern development involved large, high-value claims and were conducted in circumstances where there was typically no opportunity for an appeal of any sort on the merits of the dispute (which remains the case today). Given that parties were resolving high-value disputes in a context where they had only one bite at the apple, procedures developed that were thorough (and therefore time-consuming and expensive) in order to ensure that parties had a full (or at least reasonable) opportunity to be heard. Indeed, while flexibility and party autonomy are hallmarks of international arbitration, a typical international arbitral proceeding will often involve the exchange of a request for arbitration and a response thereto, at least two full rounds of written submissions accompanied or followed by witness statements and expert reports, document disclosure, a hearing on the merits, a further exchange of post-hearing written submissions, and frequently many other procedural features depending on the particular case.
Over time, the attractiveness of international arbitration as a means of resolving cross-border disputes grew and parties started to use international arbitration to resolve a wider range of disputes, including more lower-value disputes. At the same time, the distinction between domestic arbitration and international arbitration began to blur more in practice, and the extensive procedures that were common in international arbitration began to be used more frequently in domestic arbitration.
As arbitration made these adaptations and began to be used for a wider variety of disputes, questions inevitably began to arise as to whether arbitration was too clunky and expensive and indeed whether it was fit for purpose. In their 2018 International Arbitration Survey on The Evolution of International Arbitration, for example, the Queen Mary University of London and White & Case found that “‘cost continues to be seen as arbitration’s worst feature”, though the survey also recognised (as discussed below) that “a bolder approach [by arbitrators] to conducting the [arbitral] proceedings” could abate the costs associated with the process.
What are the costs of an arbitration?
When parties use arbitration, they inevitably incur costs that they would not incur when using court litigation. These costs include the fees of the arbitrators themselves and, if an arbitral institution is used to administer the case, the fees of that institution. The arbitrator fees are typically calculated either as a percentage of the amount in dispute or on the basis of hourly rates. Arbitral institutions will typically charge in the same manner and/or have certain fixed fees (e.g., a registration fee).
While the arbitrator and administrative fees can certainly add to the overall costs of a case, the most significant cost in an arbitration is frequently the legal fees of the lawyers representing the parties in the arbitration. Parties may encounter high legal fees in court litigation as well, but the more extensive procedures that one often encounters in arbitration (as outlined above) can often result in the legal fees being higher in an arbitration, at least in the first instance. However, arbitration may offer one relative advantage to court litigation when it comes to legal fees in that there will not be multiple levels of appeal in arbitration as there typically are in the litigation context.
What aspects of the arbitral process are the main culprits in making the process less efficient and more costly?
As noted above, arbitration is a process that is heavy on written submissions. There are often multiple rounds of written submissions, and, in practice, these submissions tend to be long and detailed. The written submissions are also routinely accompanied or followed by (often long and detailed) witness statements and/or expert reports.
Increasingly, another feature of the arbitral process that is leading to more costs is document disclosure. In many traditional court processes, a party is required not only to disclose documents that support its case but also adverse documents as well. In the arbitration process, while there is no default position as to disclosure, parties and tribunals in recent years have routinely included a disclosure stage in the proceedings (typically between the first and second round of written submissions). While parties and tribunals are encouraged to adopt a flexible and pragmatic approach to the disclosure process, as is appropriate and suitable to the dispute at hand, the process can often drag the proceedings out over several weeks or even months and involve numerous exchanges and allegations of non-compliance in practice. Undoubtedly, disclosure is important in achieving a fair resolution in a dispute and ensures that parties cases are not hindered by the unavailability of materials, but, from a cost perspective, an eagle-eyed approach to the disclosure process should be preferred.
Hearings – especially those on the merits – can also be significant drivers of costs in the arbitral process. Merits hearings will involve oral submissions by the parties’ lawyers and examination of factual and expert witnesses. These hearings can range from one day to one to two weeks or more and thus can become quite costly, especially when factoring in flights, hotels, transcription fees, and other costs. Tribunals can and often do adopt measures to limit the duration of hearings and consequently the costs involved by restricting the amount of time spent on oral submissions and questioning witnesses. Moreover, as discussed further below, remote hearings are increasingly being used, especially in the context of procedural and jurisdictional hearings.
Arbitral proceedings that are not conducted in a fair and just manner can also lead to wasted costs. For instance, in the recent case of Song Lihua v Lee Chee Hon [2023] HKCFI 2540, the High Court of Hong Kong refused to enforce an arbitral award granted in Mainland China as one of the arbitrators acted unprofessionally during the course of the arbitration proceedings. The court ruled that due to a lack of apparent justice or fairness, it would be contrary to public policy to enforce the award. The applicants in that proceeding thus would have to incur extra costs to either appeal against the decision of the Hong Kong court or seek alternative means to enforce the arbitral award.
What is being done to make arbitration faster and cheaper?
Various actors in the arbitral process are taking measures to make the process more efficient and cost effective. Perhaps the best way to make the arbitral process faster and cheaper is robust and effective case management. For example, an arbitral tribunal can and should seek to narrow the issues in dispute between the parties before setting out or fielding proposals for a timetable for parties to submit their respective cases. Some of the ways in which arbitral tribunals have sought to achieve this is by requesting parties to (1) identify issues that can be resolved by agreement, (2) identify issues to be decided solely on the basis of documents rather than through oral evidence or arguments at an interim or final hearing, and (3) agree on the length and scope of their written submissions to maintain a focus on the key issues.
Many arbitral institutions are also endeavouring to make the arbitral process more efficient and cost effective by providing procedural tools to equip tribunals to conduct the proceedings more efficiently. For example, the rules of most of the major international arbitral institutions now have provisions for expedited procedures that set forth a streamlined process devised to result in the arbitral process being completed in a matter of a few months. Some arbitral institutions now have provisions for early dismissal or summary disposal of claims so that manifestly unmeritorious claims can be disposed of at the outset. Such mechanisms are also beginning to work their way into arbitration laws. In December 2020, the Abu Dhabi Global Market (ADGM), which is a financial free zone in Abu Dhabi, made amendments to its arbitration law, the ADGM Arbitration Regulations, to include a provision for summary disposition of claims. Furthermore, the Law Commission of England and Wales made recommendations in relation to the English Arbitration Act 1996 in its final report published on 6 September 2023 that include, amongst other things, a summary disposal process.
Governments have also implemented local legislation to facilitate the enforcement of arbitral awards granted in foreign jurisdictions. In Hong Kong and Mainland China, reciprocal enforcement mechanisms under the “Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards” are in place to speed up the enforcement process. Simultaneous enforcement in both jurisdictions is possible under the Arrangement.
As alluded to above, another key development in international arbitral practice that was spurred on by the COVID-19 pandemic is the use of remote hearings. With parties to an arbitration often coming from different geographical locations, tribunals, parties, and arbitral rules have sought to embrace technological advancements and digitalisation of hearings with there being a substantial increase in the number of remote hearings conducted via online platforms, videoconferencing, or conference calls. As countries relaxed COVID-19 working measures, the adaptation of this technology nonetheless continued at a considerable level. While in-person merits hearings often continue to be preferred in arbitration, there remains a push to utilise technology where possible for case management conferences, procedural and jurisdictional hearings, and certain other applications.
Looking ahead
The arbitration process is certainly not without its flaws. Though the flexibility afforded in the arbitration process can serve to reduce the overall costs of the process, supporters of the traditional court process may point to mechanisms of the arbitral process as ultimately offsetting any savings made on costs. For now, it would appear that flexibility in the arbitration process can promote a cost-effective regime, but whether on balance it is cheaper than the traditional court process is an argument that will continue. Like so many things in life, the answer to whether it is a myth or reality that arbitration is cheaper appears to be somewhere in the middle.
