International Arbitration Series – Part 3: The Arbitration Practitioner’s Paradox

Businesses operating in the international construction and energy sectors often adopt a risk-averse approach to international disputes because of the time and costs involved and the inherent risk in any adversarial dispute resolution process.  This sometimes involves considering ways to resolve disputes by alternative means.   

Part 5 of our series on international construction and energy arbitration will consider the multitude of techniques that might be deployed to try to resolve disputes in this way.   

In this Part 3, however, Kevin Joyce and Alex Slade explore a fundamental tension between the need to prepare a case thoroughly for trial and demonstrate strength in your position in arbitration, but at the same time implement a strategy for resolving a dispute cost-effectively in an alternative way.  

What is the “arbitration practitioner’s paradox”? 

Depending on jurisdiction, a significant number of international construction and energy disputes settle by agreement before the case is decided by the arbitral tribunal.   

But more often than not, these cases only settle (and benefit from the certainty, cost-effectiveness and preservation of relationships that commercial settlement involves) because at least one of the legal teams has approached the conduct of the arbitration on the basis that the dispute will not settle. 

Put shortly, if a party commences international arbitration without a clear strategy in place and a genuine commitment to prosecute its claims all the way to a final hearing, it is likely to receive only a mediocre settlement or perhaps none at all.  This is because a poorly prepared case and uncommitted litigant is usually obvious to an opponent who will rightly exploit those failings by low-balling any settlement offers. 

In contrast, if a party pursues its claims in arbitration with vigour, thoroughness and commitment, the opposing party is likely to take those claims much more seriously.  A fuller and better appreciation of the strength of the claims is likely to elicit a significantly more favourable settlement offer from the opposing party.  

This is the “arbitration practitioner’s paradox”: a party that brings proceedings only to force an early settlement often fails to receive an acceptable one, while a party that methodically prepares its case for hearing often obtains a good settlement, making a hearing unnecessary.  Unfortunately, it is not as simple as front-loading the preparation work to be done since incurring large upfront legal fees will inevitably diminish the value to be obtained for the client from an early settlement. 

The paradox can be resolved, however. With the right advice, it is possible to prepare a case properly in order to be ready to go to hearing if needed, without destroying the cost-effectiveness of achieving a negotiated settlement as early as possible in the proceedings.

How to navigate the arbitration practitioner’s paradox 

Balancing thorough preparation of a case with cost efficiency is one of the key considerations in an effective strategic framework for the resolution of international disputes.  Striking the right balance requires a strategic approach and being thoughtful and deliberate in how resources are allocated.  It also requires flexibility – adapting your approach as the case progresses – and continuous monitoring to ensure settlement is attempted at the optimal time.   

These are the ways we find the paradox can be navigated most effectively: 

(a) Early and continuous case assessment 

It is vital to have an early appreciation of the merits of the substantive case and the strengths and weaknesses of your position, not only in determining your approach to the arbitration but in assessing the merits of settlement versus the likely outcome at the hearing.  This enables parties to make more effective decisions about how to secure the best outcome. 

The assessment then needs to be revisited regularly as the case develops, so that a party’s settlement value, position and strategy can be adjusted accordingly. 

(b) Targeted preparation 

It is important to identify and prioritise the key issues in the case that will most influence both the outcome at the hearing and the potential settlement parameters.  A party should also establish a clear and compelling narrative or legal theory, streamlining preparation of the case and enhancing its bargaining position in any negotiations. 

Crucially, a phased approach should be developed where the initial investment in the arbitration is focused on the points most likely to act as a catalyst to settlement, but without jeopardising the proper preparation of other points necessary in any eventual trial process. 

(c) Efficient preparation of evidence 

The legal team should try to limit document production to the most relevant documents and information, avoiding broad or overly expansive requests that can lead to both parties incurring excessive costs.  It should also leverage legal technology for better case management and more efficient e-discovery and document review, streamlining processes and reducing lawyer costs.   

If possible, tasks that are less critical to the case or simply can be done more cost-effectively by external vendors should be delegated. 

The team should also prepare witness evidence wisely – focusing on preparing key witness statements thoroughly while being strategic about which witnesses are truly necessary for success / early settlement. 

(d) Costs management 

Careful management of costs is fundamental to resolving the tension between case preparation and commercial resolution.  A clear budget should be developed at the outset, and this should inform a thorough cost / benefit analysis of each key stage. 

It is also vital that the legal team – and their clients – understand and are comfortable with the inevitable trade-off between preparation of the case for hearing and minimising cost.    

Similarly important is the need to consider alternative, risk-based or other fee arrangements to manage costs more effectively and facilitate the best possible preparation of the case in the most cost-effective way.  Properly aligning the approach on legal fees with the strategic approach to the preparation of the dispute puts the client in the best position to navigate the paradox successfully.  However, this requires a legal team that is experienced and flexible enough to both get the strategy right and put its money (in terms of fee structures) where its mouth is. 

Conclusion 

The approach to resolving any dispute very much depends on its own unique variables and dynamics, but in almost all cases the arbitration practitioner’s paradox needs to be considered and navigated carefully.  Do so effectively and it is likely that a party will secure the best outcome without going to hearing.  Fail to do so, and a party will merely beat its chest and bellow in the wind in any settlement discussions and inevitably end up disappointed with the resulting settlement or the tribunal’s final decision. 

Posted by: Kevin Joyce and Alexander Slade