MYTH OF COST EFFECTIVENESS IN ARBITRATION

Since, the era of White industries case,the there have been enumerous instances where parties to arbitration preferred ad hoc arbitration over institutional and thereby led to greater expansion of the former over the latter.“Ad-hoc arbitration is considered less expensive than institutional arbitration, as the parties only pay fees of the arbitrators, lawyer’s fees, and the costs incurred for conducting the arbitration. This is so because in ad-hoc arbitration, parties tend to negotiate and settle fees with the arbitrators directly, which allows them the window to negotiate and reduce the fees.The Act by virtue of Section 15 aims to facilitate the conduct of international and domestic arbitration and conciliation as well as provide cost effective and timely services for the conduct of the arbitration and conciliation at national and international levels.”

“The Supreme Court Judge,Indu Malhotra J. has opined that the recent Section 34 amendment  did not need any more alterations.Arbitration is as good as the arbitrator who conducts the arbitration proceedings. it is necessary to appoint trained arbitrators with domain knowledge of the subject they are dealing with and a person of integrity rather than widen the scope of judicial review.” “Proponents of early dismissal mechanisms in international arbitration have argued that summary procedures would increase arbitration’s efficiency by disposing of meritless claims early on rather than forcing parties to engage with them through a full proceeding, including document disclosure, submission of witness statements and expert reports, and an evidentiary hearing. These proponents argue that the failure to provide an early dismissal mechanism detracts from arbitration’s claims of efficiency and cost-effectiveness because it allows parties to assert meritless claims or defenses that likely would be subject to early dismissal in federal U.S.-style court litigation. Even partial dismissal of claims or defenses would make proceedings more efficient by allowing tribunals to focus on the most important, meritorious claims/defenses. Arbitral institutions can take a number of steps to further mitigate concerns that parties will make early dismissal applications despite little chance of success. First, they can provide a cost-shifting mechanism that requires the losing party to pay the other side’s cost of defending an unsuccessful application, even if the losing party ultimately is successful in the arbitration.”

Since speed, costs and enforceability are some of the users’ primary concerns, arbitral institutions have responded with innovations to improve and develop the system.This is geared toward meeting the needs of disputants, thus raising the standards in speed, costs and enforceability. That being said, arbitration practice is still growing and there is room for improvement where costs and speed are concerned. arbitration proceedings have increasingly been conducted in the manner of litigation’, which may erode the costs and speed advantages formerly specific to arbitration. Cost concerns are tightly intertwined with the speed at which the arbitration progresses since a large part of costs incurred is attributable to the fees and expenses of the parties’legal representatives. A 2015 study by the International Chamber of Commerce Commission on Arbitration and Alternative Dispute Resolution found that arbitrators’ fees and expenses accounted for only 15% of the costs of arbitration; administrative fees made up another 2%; while the remaining 83% was made up of lawyers’ fees and other party costs.Therefore the most significant way costs can be reduced is by encouraging greater efficiency in the disposal of disputes.There is also the potential that the mediation may end up being conducted like a mini-arbitration, rendering it almost as time and cost-consuming as a fully-fledged arbitration. Furthermore, even if mediation is successful, the parties only end up with a mediated settlement agreement which is not easily enforceable.

1. INDIA:Prefering Ad-hoc over institutional

“Ad hoc arbitration is less expensive than institutional arbitration. The parties only pay fees of the arbitral tribunal, lawyers, or representatives, and the costs incurred for conducting the arbitration, i.e., expenses of the venue charges, etc. The parties will save the administrative fee paid to any institution.In more complicated cases, the arbitral panel may hire a tribunal secretary to handle the arbitration, particularly if it involves a lot of paperwork. The parties are responsible for these fees, which will be added to the arbitration costs. Default settings In ad hoc arbitrations, proceeding with the procedures in the absence of one of the parties may be riskier, because the absent party may subsequently challenge the decision on the grounds that the arbitral tribunal did not provide him with a fair hearing.While ad hoc arbitration may appear ideal in today’s modern and commercially complicated environment, it is only appropriate in domestic arbitrations for claims involving less wealthy parties. Institutional arbitrations, while being more costly, time-consuming, and rigid may be more appropriate in the sense of international commercial disputes.”

“International arbitration is associated with a number of perceived advantages. These include mainly suitability for international disputes , cost and speed.An overwhelming majority of the parties ranked a fair and just result as the most important attribute, even above the receipt of a monetary award, speed of outcome, cost or arbitrator expertise.There are, of course, several perceived disadvantages. These include increased costs, length of arbitration proceedings, that third parties may not be joined and that parallel proceedings cannot be consolidated. Most in-house lawyers interviewed admitted that the traditional grounds for opting for arbitration arbitration being faster and more cost effective than litigation are no longer true in most cases. However, the success of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards compensates for these failures in cost and time. On the issue of costs, some in-house lawyers interviewed believe that a cost/benefit analysis makes the costs incurred reasonable. However, a majority voiced concerns over the ever increasing costs of international arbitration cases as compared to the first stage of litigation before a national court.The top drawbacks of international arbitration are that it is often alleged that arbitration is expensive and this is the single main concern of the users of arbitration. Costs will be discussed below but this is a matter that both lawyers representing parties in international arbitration and arbitration institutions will have to consider.What was often disregarded was the distinction between pure arbitration costs like cost of arbitration institution and arbitrator fees and legal costs associated with the dispute settlement in particular, attorney fees and other costs of legal representation.A clearly defined dispute resolution policy saves time and invariably costs by serving as an indicator to the various stages and applicable limitations.In negotiating which institution to appoint, it is reputation of the institution and possible costs are the main factors. Although the ICC was particularly criticized for its cost and bureaucracy most in-house lawyers interviewed still opt for the ICC because of its reputation.

Corporations believe such appointees save them time and money and that it makes business sense to so appoint. As to which is more important, specialization or experience, in-house lawyers would opt for an arbitrator with both even where this may cost them more in terms of fees and time. There is little data available on the issue of costs awarded in international commercial arbitration cases but the issue has attracted considerable scholarly discussion. One of the main advantages of international arbitration is that it can be cheaper than litigation. However, in recent years corporations have started to complain that arbitration has become increasingly expensive.Costs related to arbitration can be divided into two main groups: arbitration costs and legal costs. Arbitration costs include the arbitrators’ fees,expenses connected with the hearings fees and expenses of any experts appointed by the tribunal and the administrative expenses of the arbitration institution, if the arbitration is an institutional one. Cost is seen as both an advantage and a disadvantage of international arbitration.The perception put to the test is that corporation believe that international arbitration is cheaper than international litigation. For users of arbitration, although arbitration is considered expensive, it is also an efficient process and several benefits of the process outweigh the problem of costs.Corporations operating in the West appeared to be less worried about the cost incurred in international arbitration proceedings. They would almost certainly use external counsel specialist in either the subject matter of the dispute and/or international arbitration. Lack of  familiarity and the threat of cost are putting off parties from developing countries. At the same time corporations from common-law jurisdictions as well as several civil-law jurisdictions such as Sweden, France and Italy, consider the costs to be adequate given the expertise of arbitrators and overall quality of services provided in arbitration.

 The general counsel of a state-owned petroleum corporation in a developing jurisdiction said arbitration, “is very expensive and not cost effective,” while the general counsel in a machine tools manufacturing corporation in Japan for his part believes arbitration is expensive for low value disputes but for high value disputes, the value and cost even out as it is cost and time effective.” “However, many scholars are of view that “arbitrators will be more timid and conventional, rejecting bold decisions that could reduce the time and cost of the proceedings or otherwise lead to a more effective resolution of the dispute. Arbitrators should instead be encouraged to seize the reins of the proceedings while maintaining faith in their ability to render sound, enforceable awards”.

2. Disadvantages and Remedies

2.1.  Cost Disadvantages

“Some significant disadvantages in terms of costs in arbitration are:

1.Despite purported cost benefits from using alternative dispute resolution (“ADR”), arbitration can be just as expensive as litigation if not more costly.

2.Reluctance of the Supreme Court to clarify the problems with mandatory arbitration has increased the likelihood of ongoing litigation and uncertainty about enforcement of mandatory arbitration agreements.

3.A growing judicial hostility to unfair mandatory arbitration procedures in the lower courts has made arbitration more like litigation, including adding certain components that increase the costs of arbitration.

4. Some members of Congress and certain civil rights groups have shown a strong determination to challenge these agreements, and their efforts have contributed to the essential abolishment of mandatory arbitration agreements in the securities industry.

5. Tremendous opposition from the Equal Employment Opportunity Commission has made mandatory arbitration agreements essentially worthless in instances where the EEOC has disregarded these agreements, assisted others in challenging their enforcement in court, and successfully obtained injunctive relief and monetary damages from courts in their own actions against companies to attack the use of these agreements.

6. With evidence of resounding results on behalf of employers in the litigation process and absent evidence that arbitration will provide similar results, employers have no real advantage and little incentive to use mandatory arbitration.”

2.2. Remedy:Online Arbitration

“Arbitration is less expensive than litigation, so online arbitration could be a viable option for crowdfunding investors. A cost-effective arbitration remedy to deal with crowdfunding fraud claims where entire crowdfunding arbitration should be conducted online, to reduce the cost of resolving claims.Online dispute resolution shares many of the advantages of face-to-face alternative dispute resolution-including lower costs, increased speed,and greater informality – a creative solution to the high transaction costs associated with offline arbitration. But online arbitration is both faster and less expensive than traditional arbitration.The key inconvenience of traditional alternative dispute resolution is showing up at a particular time and place for arbitration sessions. Online arbitration eliminates that where entire crowdfunding arbitration should be conducted online, to reduce the cost of resolving claims.Online dispute resolution shares many of the advantages of face-to-face alternative dispute resolution-including lower costs, increased speed,and greater informality – a creative solution to the high transaction costs associated with offline arbitration. But online arbitration is both faster and less expensive than traditional arbitration.The key inconvenience of traditional alternative dispute resolution is showing up at a particular time and place for arbitration sessions. Online arbitration eliminates that cost making the distance between the parties irrelevant.If the cost of resolving the dispute is greater than the total value of the case, investors will not use the dispute resolution process.”“Even in simpler disputes, the costs of arbitration for such things as the fees for the arbitrators and the administering body, as well as charges for the hearing room, can significantly deplete any savings achieved in reduced attorney fees.”

3. Tracing on Amazon-Future Case

“It is not surprising that cost is a controversial issue. Interestingly enough the respondents do not distinguish between the cost of arbitration and specific costs. A survey provides evidence that most of the costs are legal costs, which in principle should be the same as in transnational litigation. International arbitration is at least as expensive as litigation for middle and smaller sized cases. The fact that the costs of international arbitration are comparable to transnational litigation indicates that although arbitration costs may be substantial in actual terms, they do not excessively overburden the totality of expenses. What seems to be the issue here is that the perception that arbitration is inexpensive can no longer be supported.he future of international arbitration is quite rosy. Corporations identify specific issues which have to be addressed, including cost, multiparty disputes, and enforcement, but they appear confident that the law and practice can generate adequate solutions.” 

In the Amazon vs. Future group case, it was observed that much , contrary to what an Indian company would prefer which  is ad hoc arbittration, Amazon went ahead for an instititutional arbitration under SIAC Rules formulated under Singapore Convention.Not surprisingly,Future group , being an Indian company, delineated defiance to the emergency award obtained against it.Pursuant to enforcement of the emergency award, Future group moved to the Delhi High Court and later the case had been forwarded to the Supreme Court by appeal alleging interference by foreign firm while dealing with Reliance.Little is known about the cost of arbitration by the parties during obtaining the emergency arbitral award, however, speaking of Future Group it was definitely a bane in disguise simply because of the fact that this award shall subsequently lead to a huge sum of loss to the tune of Rs.27,513 Crore, as the company struck a deal with Reliance of this amount which definitely poses a greater cost disadvantage to a party.As a matter of fact, Reliance is one of the highest taxpaying private sector company of this year.Such consequences can also be viewed in the light and nature of contracts of adhesion or boilerplate contracts where parties are not placed at apr each other in terms of negotiability.According to my humble opinion, this disparity in bargaining position in the main contract which places one party in a superior position compared to other was an element which should have been taken into consideration by the Hon’ble Arbitrator in this matter .Similar to the condition of prohibited persons in this case,in contracts of adhesion is an agreement where one party has substantially more bargaining power than the other the other party has little or no ability to negotiate more favorable terms  in setting the terms of the contract.

Aishwarya Says:

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