How long is the string?

Manfred Arnold addresses some frequently asked questions on arbitration

THERE are certain questions which are asked quite frequently. But they are questions which cannot be answered unequivocally and definitely. Every time I use the “it all depends” answer, I get the feeling that credibility appears to suffer. It is not that one is embarrassed or has anything to hide, but certain ingredients, which would help to formulate a cogent response, are not available. If you ask how much a glass of wine costs, the answer may be, “Which one?” or “It depends.” Even if you specify vintage, region and type, you are not quite there yet.

In the context of arbitration, the questions of “how long does it take” and “how much does it cost” are frequently asked. Even with the best of intentions, there is no ready and complete answer. The closest one can come to it is when one uses as an example special procedures, such as the SMA Rules for Shortened Arbitration Procedure or London’s Small Claims Procedure. Even though these specific rules have proven to be quite successful because of their time limitations and fees caps, they are not suitable for a great number of cases. Cases which are complex require multiple hearings, testimony of witnesses and lengthy arguments. In the past, parties have tried to bring larger claims into the simplified arbitration procedures to benefit from the procedural schedule and the cost cap, but it has not worked well for the most part.

These simplified procedures also impose their own limitations, which need to be weighed against their advantages. With respect to speed, the SMA Rules provide that (a) in the event the respondent fails to nominate an arbitrator within ten days from the initiation of the arbitration, the claimant’s nominee shall become the sole arbitrator; (b) within 15 days, the arbitrator shall establish a written schedule for the claim; (c) the respondent’s submission needs to be received within 20 days; (d) the matter proceeds on documents alone and does not permit discovery, and (e) the award will be published within 30 days from the close of the proceedings. An award for legal fees shall not exceed $2,500 and the arbitrator’s fee is capped at $1,500.

The question as to how long an arbitration may take is difficult to answer. If everyone is willing to proceed and bring the matter to a prompt conclusion, it is obvious that it will take less time than for a case where the parties have endless procedural arguments or one party is reluctant to come to the table. But this realisation does not help to come up with a conclusive answer. There are various factors, internal as well as external, which affect the length of the arbitration - the availability of the arbitrators, common available dates for the panel and counsel, time required to collect data and prepare, the number of hearing days, the post-hearing briefing schedules and then the speed with which the arbitrators decide the matter and formulate the award. The availability of fact and expert witnesses also plays an important role.

The only definitive way to have certainty about the length of an arbitration is for the parties to stipulate a timeframe. Several arbitrations have been conducted recently in New York pursuant to an arbitration clause which states that “. . . the arbitration award shall be rendered in writing within forty-five (45) days after the arbitration has been initiated.” In one of these cases, I was appointed chair on August 27, the hearings were held on September 21 and 22 and the award was issued on September 24. It works, but having the assurance regarding the duration does not provide a similar answer for the arbitration expenses i.e., attorneys’ fees, stenographic costs and arbitrators’ fees. These expenses probably increased because of the time constraints.

The question of ‘how much’ seems to focus on the arbitrators’ fees, even though that is only one component of the cost factor. A New York lawyer asked arbitrators how much they would charge per hour for serving on a particular case, and subsequent to that, some of the arbitrators even began to volunteer this information in their disclosure statements. What does it prove with respect to the ultimate arbitrators’ fees and costs? Yes, it is an important ingredient, but without the time element, it makes little sense. If one arbitrator reads faster than his colleagues, he may have less prep time.

Many years ago, in an arbitration workshop, a participant was asked to explain how he arrived at a $10,000 fee for himself in the mock arbitration. A member of his team stated that his fee for such a case would be $1,000. His response was that he had never encountered a case like this and had to read up on it, and even bought a special book which covered the subject. Fortunately, it is not a real-life example, but a workshop experience, and hopefully others learned from this incident.

I am not convinced that lower arbitrator costs provide an answer or explanation. I recall a case in which I, as president of the SMA at the time, was requested to put together a list of potential arbitrators, including their hourly rates. The dispute involved the building contract for a passenger ship. The parties asked for a list of ten SMA members who would be willing to serve on this case, estimated to take about 50 days. Most arbitrators stated their regular rates; others reduced the fees substantially, probably because of the prospect of a 50-day employment. In the end, the parties agreed upon three busy and suitable arbitrators from the list who charged their regular fee. To a certain extent, this experience shows that money/cost is a factor, but not always a decisive one.

Some arbitration centres have established tariffs or pay schedules by which you can pinpoint the arbitrators’ compensation, but it will not give the full picture for the overall costs. There is no way to quantify in advance the legal fees and expenses unless you have a case handled on a contingency basis (under which counsel is paid a percentage of the recovery) or fixed fee. The cost of a case can also drastically differ from another case with a similar size claim amount, if experts, inspection or other investigations are necessary.

There is a degree of curiosity about arbitrators’ fees, how they are calculated and whether their levels are justified. It probably is in part attributable to envy because arbitrators do not seem to keep regular office hours, they travel extensively, show up at conferences and, according to some critics, can charge for the time when they walk their dog (provided, of course, that they think about a case). But those who wonder must also consider that there are no job guarantees for being an arbitrator. If you don’t work and put the time in, you don’t get paid. There is no automatic entitlement to paid vacations, medical insurance or a pension. I realise, of course, that these are not conditions limited to arbitrators alone but apply to anyone who works for his own account or who freelances.

One of the questions that does not get asked is when do arbitrators get paid. It all depends. Sometimes promptly, sometimes late, and on occasion not at all. Because of changing attitudes by the parties and clubs, it has became necessary lately to look for greater assurance. For many years, the SMA Rules provided in Section 37 that the panel may require the parties to post security for estimated fees and expenses. Likewise, the LMAA terms cover this aspect. It helps, but it does not always solve the problems.

What should arbitrators do when they don’t get paid? There was always the provision that the fees and expenses were a joint and several obligation of both parties, which seemed to protect the panel. It now appears that, in some recent cases, neither the parties nor their underwriters felt bound by that traditional “bond.” Should they just forget about it or should they sue? A judge in the Southern District of New York once addressed the matter of arbitrators’ fees. When an attorney argued against the arbitrators’ entitlement to demand an escrow deposit for their fees, the judge compared arbitration to a car and said, “If you don’t put any gas in it, it won’t run.”

Let me conclude with a little story to which the title of this article certainly does not apply - that episode has no “it depends” option. At a recent impromptu arbitration seminar conducted by Patrick O’Donovan and myself in Singapore (under the auspices of the Singapore Institute of Arbitrators), a delegate asked whether, in a close contest, we would favour a western company over an eastern company. Both of us were somewhat taken aback, as it seemingly put in doubt the very essence of arbitration, the concepts of fairness and even-handedness as well as the legal principles of right and wrong. We explained that if you are right in your position, you should win. The fact that you represent an American or British company should not give you an edge or special leverage, under any circumstances.

The odds for winning are set when you have the facts and the law on your side. On a given day, even the devil may be right and win an arbitration.