Arbitration in practice

Arbitration agreement

Before commencing an arbitration, the starting point is to review the terms of the arbitration agreement carefully and take expert advice as appropriate, including on the applicable procedural rules.

If the arbitration agreement has been drafted properly, it will contain important information about how the arbitration will proceed, such as whether the nature of the dispute falls within the scope of the agreement, whether the arbitration will be administered by an institution or ad hoc, and whether any selected arbitrators must possess particular qualifications or characteristics.

For tips on how to ensure that an arbitration agreement is properly drafted and does not cause problems later on, see Drafting an Arbitration Agreement.

If there are any particular issues or questions arising out of a review of the arbitration agreement, it is better to try to address these at any early stage.

Pre-arbitration requirements

Sometimes an arbitration agreement will provide that a party must take certain procedural steps before commencing an arbitration. For example:

• There may be a requirement for a ‘cooling off period’ in which the parties can seek to resolve their disputes amicably before resorting to arbitration. This might be through discussions between the parties’ representatives.
• The dispute might be escalated beyond these discussions to formal negotiations or mediation, the latter of which is facilitated by a neutral third party mediator. [This Toolkit does not consider mediation in detail. However, we can provide you with further advice on Mediation further advice on Mediation here.

Limitation periods and protecting your position

It is important that the arbitration is commenced before any relevant limitation period has expired.

The proper commencement of arbitration proceedings will stop the limitation clock from running, but what ‘commencement’ means depends on the wording of the arbitration agreement and/or the applicable institutional rules. For example, under the London Court of International Arbitration (LCIA) 2020 Arbitration Rules, the requirements for commencement include paying the relevant registration fee.

A limitation period may be derived from statute or contractual agreement between the parties.

If a party is uncertain about whether the dispute falls within the scope of the arbitration agreement or whether arbitration is the proper forum for any other reason, it is important to act quickly to protect the position. Some options that may be available (depending on the applicable national law) are:

• concluding a standstill agreement with the counter-party to suspend time for the purposes of limitation;
• entering into a new arbitration agreement to clarify the proper forum or scope; or
• issuing ‘protective’ proceedings by commencing litigation and arbitration simultaneously. This may not be possible to do in all jurisdictions and must be done carefully to ensure that the right to arbitrate is not waived or compromised by commencing court proceedings.

Third party funding

While arbitrating a claim can be less costly than court proceedings, legal fees and expenses (including the fees of the tribunal) can still be significant.

Third party funding is where a funder (unconnected with the case) agrees to finance all or part of the costs of the arbitration in exchange for a share of any award or settlement received by the funded party. Typically, the funder and the funded party enter into an agreement whereby the funder is repaid its original investment and receives a percentage of the sum obtained by the funded party. Depending on your jurisdiction, there may be specific regulations or requirements with which such an agreement must comply.

The process of bringing a funder on to a case can take time and generally includes the following stages.

• Stage 1: initial review and due diligence. The funder will review the key documents in the case to understand the background and may seek a legal opinion from external counsel on the strengths and weaknesses of the case. The funder will also consider the economics of any potential funding arrangement and undertake checks to verify there are no conflicts of interest or underlying policy considerations that might impact its decision on whether to fund the case.

• Stage 2: funding. If the funder is satisfied and agrees to provide funding, it will enter into a written agreement with the party seeking funding and funding will commence pursuant to an agreed timeline. It may also be necessary for the funded party to make a disclosure of the funding to the tribunal and other party/parties to the claim.

• Stage 3: ongoing monitoring. The funder will require updates on the case so that it can monitor progress until it is resolved.

Insurance in international arbitration

A party might also want to protect themselves from certain risk by obtaining insurance, including by way of example:

• After the event (‘ATE’) insurance: a type of insurance purchased after the dispute has arisen to cover a claimant’s liability for ‘adverse costs’ (i.e. their opponent’s costs), in the event that the opponent is successful and the insured party is required to pay the opponent’s costs.
• Arbitration Proceedings Award Default (‘APAD’) insurance: in an arbitration claim brought against a state, APAD insurance covers the risk that the state fails to pay an arbitration award made against it.

It is important to start an arbitration correctly. If not, the tribunal may not be able to hear the claim or any award resulting from the arbitration may not be enforceable.

Form and content

If the arbitration is subject to institutional procedural rules, it is important that the Request for Arbitration (known as the ‘RfA’) complies with the formal requirements set out in the relevant rules.

For example:

• An RfA submitted under the LCIA 2020 Arbitration Rules must include: the name, nationality and contact details for the parties and their legal representatives; the arbitration agreement; a summary of the nature and circumstances of the dispute and the estimated value; the agreed/proposed procedural matters; and details of the nominated arbitrator(s).

• Under the ICC 2021 Arbitration Rules, the RfA must include: the name and contact details of the parties and their legal representatives; the nature and circumstances of the dispute (in sufficient detail to cover all possible claims arising out of the dispute); the relief sought and quantified claims; the arbitration agreement; and the proposals for the nomination of arbitrators and procedure (such as the applicable law and the language of proceedings).

If there is no arbitral institution administering the dispute, the requirements of the law of the seat apply.

Process

If there is an arbitral institution administering the dispute, the RfA will need to be submitted to the institution in accordance with the procedure set out in the institutional rules. Many institutions accept electronic submissions. The institution may require a submission fee, see the Fees box below. The RfA will also need to be served on the other party.

If there is no arbitral institution administering the dispute, the party commencing the arbitration should generally follow any process for sending and serving notice contained in the arbitration agreement and/or underlying contract.

The arbitrator(s) will be appointed pursuant to the terms set out in the arbitration agreement, either by the terms expressly set out or by reference to the procedural rules of an arbitral institution.

If no procedural rules have been specified, the procedure set out in the applicable national law will be followed.

Key considerations when selecting an arbitrator

Choosing the right arbitrator is a key strategic question and the process of selecting and appointing an arbitrator can be lengthy.

A party will need to conduct their own due diligence on potential candidates. Important factors to consider include:

• a candidate’s likely approach to the legal case;
• their personality, likeability and powers of persuasion if they will sit on a tribunal with two other arbitrators;
• their working style;
• their availability; and
• their language skills.

This due diligence may be performed by:

• researching a candidate’s public profiles;
• reviewing a candidate’s published awards and other written works; and
• gathering intelligence from practitioner networks (subject to confidentiality restrictions).

Depending on your jurisdiction, there may be certain restrictions on the parties’ freedom to choose arbitrators.

Independence and impartiality

Any candidate will need to confirm that they are ‘conflict free’. An institution will require the arbitrator to confirm this and that they are independent and/or impartial with regard to the parties to the arbitration. There may also be other requirements under the applicable national law.

Many arbitrators and some institutions and courts refer to the International Bar Association’s (‘IBA’) Guidelines on Conflicts of Interest when considering questions of impartiality and independence. These Guidelines are non-binding, but provide relevant criteria that can be useful in assessing individual situations

If an institution is administering the arbitration, a fee will be payable to the institution. The applicable rules will confirm what fees are payable and when.

Failure to pay a fee can have serious consequences. For example, the LCIA 2020 Rules confirm that if the registration fee (which is to be paid upon submission of the RfA) is not received, the RfA is treated as not having been delivered and the arbitration is not commenced. This means that the limitation period will continue to run until the registration fee is received.

Fees will also be charged for the work performed by the arbitrators and the institution’s administrative time. Examples are below.

• The LCIA bases the fees of the arbitrators and of its staff on fixed hourly rates. For example, under the 2023 Schedule of Costs: an LCIA case administrator’s rate is £220 per hour. For arbitrators, the rates will differ depending on the complexity of the dispute but are, under 2023 Schedule, generally capped at £650 per hour.
• By contrast, the ICC uses an ad valorem This means that it sets costs based on the overall value of a claim. The ICC provides a ‘costs calculator’ which parties can use to check potential arbitrator fees in advance. This costs calculator indicates that, for example, a sole arbitrator’s fees for a claim worth US$2.5 million could be approximately US$24,000 to US$107,000. For a claim worth US$50 million with three arbitrators, each arbitrator’s fees could be approximately US$33,000 to US$142,000.

Most institutions will require the parties to pay a portion of the tribunal’s costs in advance when issuing the claim and then at periodic intervals throughout the proceedings. These payments are referred to as ‘advances on costs’. The amounts requested are generally split equally between the parties, but if the respondent party refuses to pay then the claimant party will typically be invited (and required) to cover its share.

The powers and duties of the tribunal are derived from a number of key sources:

• the arbitration agreement: powers and duties can come from the original arbitration agreement. Parties can also amend these by agreement throughout the proceedings;
• the procedural rules of the institution administering the arbitration: these are usually very broad such that the tribunal still has a large degree of discretion; and
• the applicable national law: if there is a ‘gap’ in relation to procedure that is not covered by either the arbitration agreement or the relevant procedural rules, the matter will be dealt with based on the law of the seat of the arbitration.

Arbitral tribunals have wide powers. However, they often adopt the same basic procedure to administer the proceedings, as explained below

The procedural rules provide a procedural framework for the arbitration and generally cover:

• the commencement of proceedings;
• how the arbitrator(s) will be appointed;
• how proceedings will be conducted, including disclosing documents and presenting evidence;
• the conduct of any hearings;
• rendering awards; and
• how costs will be determined.

While the procedural rules vary from institution to institution, typically they allow the parties to present their respective cases through two rounds of written submissions, with supporting factual and expert evidence.

When it comes to disclosing documents and presenting evidence, the parties may agree and/or the tribunal may order that the IBA Rules on the Taking of Evidence in International Arbitration apply. These Rules address all forms of evidence, including document production, witness and expert evidence. Even if not formally adopted, arbitrator(s) and parties often use them as guidance when making decisions relating to documents and evidence.

The proceedings usually culminate in an oral hearing, which may be in-person, virtual or a ‘hybrid’ mixture of the two. This depends on the applicable circumstances, the parties’ preferences and is ultimately the decision of the tribunal. It is also possible for a case to be decided ‘on the papers’ without an oral hearing.

In ad hoc proceedings, where no institution is administering the arbitration, how the proceedings will be conducted will be governed by the law of the seat.

An arbitral award is final and binding, generally subject to limited rights of challenge (or appeal) which vary from jurisdiction to jurisdiction.

The limited grounds provide certainty to parties but, at the same time, if a party is dissatisfied with the tribunal’s award, it can be very difficult to mount a successful challenge/appeal.

Arbitral awards are generally enforced much more easily and quickly than court judgments, particularly in cross-border disputes.

Many countries have regimes in place that provide for the reciprocal enforcement of arbitral awards. One of the most significant of these is a multi-lateral treaty, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the “New York Convention“. The New York Convention has over 170 state signatories and provides a regime for the enforcement and recognition of arbitral awards within those contracting states.

In this regard, arbitration has a distinct advantage over court litigation: while there are legislative regimes and multi-lateral treaties on the enforcement of court orders, these are not equivalent to the New York Convention in terms of the number of signatories or the straightforwardness of the procedure.

These materials are written and provided for general information purposes only. They are not intended and should not be used as a substitute for taking legal advice. Specific legal advice should be taken before acting on any of the topics covered.

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