In Opinion

This blog post first appeared on the Practical Law Arbitration Blog on 15 February 2016.

Counsel, institutions, and tribunals must bring settlement/ADR firmly within the arbitration process in order to satisfy clients and reduce third-party funding costs

In the latter half of 2015, the Queen Mary/White & Case International Arbitration Survey 2015 re-confirmed international arbitration as the primary way to resolve cross-border disputes. Whilst its best feature remains the international enforceability of awards, users are concerned that it costs too much and takes too long. In seeking ways to address these issues, the survey asked users to state what arbitration lawyers can do better. In-house counsel resoundingly voted for arbitration counsel to do more to encourage settlement of disputes in the course of arbitration.

It might interest readers to know that arbitration funders, who want to see arbitration counsel demonstrate a robust settlement strategy as part of their overall dispute resolution plan, share this sentiment.

In this blog, Robert Rothkopf, Managing Partner of Balance Legal Capital LLP, argues that tribunals and institutions should complement the call for arbitration counsel to do more to encourage settlement by imposing costs consequences in the costs award.

Arbitration counsel and attitudes towards settlement strategy

Almost half of the QMWC 2015 survey respondents were private practitioners (49%). 90% of all respondents stated that international arbitration remained their preferred method of resolving cross-border disputes but that figure was split into two groups:

  • Those that prefer international arbitration as a stand-alone method made up 56%.
  • Those that use it together with other ADR made up the remaining 34%.

Filtering the data to exclude private arbitration practitioners might reveal that the balance in these numbers shifts in favour of a combined arbitration/ADR process. Indeed, the survey reveals elsewhere that there are divergences between what in-house lawyers want, and what their external arbitration advisers are currently providing in terms of settlement or ADR initiatives as part of the arbitration process. Respondents were asked, “What could arbitration counsel do more or better” in innovating to reduce time and costs. The most popular answer from in-house counsel was, “Encourage settlement, including the use of mediation during arbitration”, whereas, across all respondents, this answer fell to third place.

This may not be conclusive evidence that settlement strategies or mediation are being passed over by arbitration counsel, but it would match the common experience of third-party funders when assessing counsel on their strategy for winning a dispute that is being considered for funding: namely, settlement or ADR is often overlooked. A funder not only requires arbitration counsel to have a clear strategy for winning the case at trial, but also a cogent view of the matter’s unique settlement dynamics and a robust plan as to how those levers should be used. Counsel without a settlement strategy, or good reasons why settlement/ADR cannot be pursued, will likely deter a funder from providing financial support.

Ignoring settlement strategy leads to greater third-party funding costs

In almost all instances, it is in both parties’ interests to settle the arbitration early, and at least before the expense of a hearing. A claimant supported by third-party funding sends a strong message to its counter-party that it has the means to fight the case all the way to the final award. Transferring part or all of its costs to a funder and only sharing a proportion of damages with the funder if the case wins, eliminates much of the costs risk. However, most funders require an increase in their minimum returns once it is clear that a matter is unlikely to settle before trial, reflecting the associated increase in risk. At the hearing, witnesses, counsel and arbitrators can perform unpredictably, no matter how well the legal case stands up. Properly considered, reasonable settlement opportunities serve the interests of both clients and funders, particularly if they do not add too much time and expense to the main arbitration procedure. The QMWC 2015 survey reported strong adherence to mediated settlements: only 8% of respondents stated that they had problems enforcing mediated settlement agreements, and 36% stated that they had no issues.

Tribunals and institutions: evolution towards cost-consequences for rejected settlement offers

Settlement attempts should also be encouraged through cost allocation by the tribunal after merits and quantum have been determined. The report by the ICC Taskforce on Costs published in December 2015 surveyed the approaches that tribunals take to cost allocation under all of the major arbitration rules. It showed that tribunals consider various factors in making their costs awards and do not always consider (or have available) the evidence as to whether one party has been unreasonable in rejecting settlement offers in the course of the arbitration.  Addressing this would better serve all stakeholders in arbitration.

The ICC report suggests a mechanism by which the secretariat can hold information regarding settlement offers and disclose it to the arbitrators only after they have decided on the merits so that information around settlement attempts does not prejudice the tribunal’s merits determination. Other arbitral institutions should offer this service and bring it into mainstream arbitral practice, if permitted by the law of the seat.

There is no regime in international arbitration akin to Part 36 of the English Civil Procedure Rules, where cost protection applies to a party that makes a settlement offer that is not beaten at final judgment. However, the suggestion in the ICC’s report that such a regime could be raised at the first case management meeting and incorporated by the parties into their arbitration procedure is a good one and should be widely implemented.

Conclusion

The arbitration system would better serve the interests of parties and funders if initiatives are implemented, which have been designed to increase the efficiency of arbitration and to promote sensible settlement discussions. Funders will agree with the in-house counsel respondents to the QMWC survey in their call for arbitration counsel to do more to encourage settlement. Arbitration counsel will improve the fundability of their cases if they incorporate this into their case strategy. It will demonstrate that pursuing a full-blown hearing is not the only option under consideration. Tribunals and institutions imposing costs consequences for unreasonable rejection of settlement offers (if permitted by the law of the seat) should complement changes in practice by arbitration counsel. Implementing the simple mechanism suggested by the ICC Taskforce on Costs, would result in the early settlement of more disputes. Furthermore, more litigants will attract the support of third-party funders, and the costs of third-party funding will fall.

  • Robert Rothkopf
    Robert Rothkopf Managing Partner

Robert Rothkopf is the managing partner of Balance Legal Capital LLP, a provider of third-party funding for international arbitration and litigation, headquartered in London, UK. Prior to founding Balance, Robert was a disputes lawyer in the international arbitration group at Herbert Smith Freehills in New York, London and Moscow.