The Value of Rules and the Risks of Discretion: Arbitration’s Protean Nature
THE VALUE OF RULES AND THE RISKS OF DISCRETION: ARBITRATION’S PROTEAN NATURE*
In most matters it is more important that the applicable rule of law be settled than that it be settled right.
Louis Brandeis1
A. Introduction: The Why and How of Arbitration
Diversity of motive and method
Let us go back three-quarters of a century. In June 1927, the National Geographic Magazine published an article describing law reform under a Manchu emperor who reigned in the early eighteenth century. Emperor Kang-hsi decided that courts should be as bad as possible so his subjects would settle disputes by arbitration. Responding to a petition about judicial corruption, he decreed as follows:
Lawsuits would tend to increase to a frightful extent if people were not afraid of the tribunals … I desire therefore that those who have recourse to the courts should be treated without any pity and in such a manner that they shall be disgusted with the law and tremble to appear before a magistrate. In this manner … good citizens who may have difficulties among themselves will settle them like brothers by referring to the arbitration of some old man or the mayor of the commune. As for those who are troublesome, obstinate and quarrelsome, let them be ruined in the law courts.2
So here is one reason to arbitrate: the hope of avoiding a grossly mismanaged judicial system. But there are other motives. For international transactions, arbitration offers the hope of reducing bias and the prospect of parallel lawsuits in different countries. There may also be the expectation (whether warranted or not) of confidentiality and expertise. In some countries, such as the United States, arbitration has been fueled by a hope of keeping consumer and employment cases away from sympathetic civil juries inclined to award high punitive damages.
Arbitrations also show enormous variation in the mechanisms used to establish the facts and the law. A letter of credit dispute might be arbitrated in a few hours on the basis of documents only. At the other extreme, a large construction case could involve years of proceedings, with pre-trial discovery, depositions, motions on applicable law and jurisdiction, as well as witness statements and extensive cross-examination.
This variety should not be surprising, since arbitration (like dispute resolution in general) runs the gamut from large investment controversies to small credit card debt collection. The spectrum of subject matter includes construction, baseball salaries, biotech licenses, expropriation, joint ventures, automobile franchises, distribution and agency contracts, employment discrimination, insurance, collective bargaining agreements and Internet domain name disputes.
The moral flavour of arbitration differs dramatically from context to context. The values of fairness and efficiency that commend arbitration to sophisticated business managers often serve to condemn the process in consumer cases, where an arbitration clause might require an ill-informed individual to seek uncertain remedies at an inaccessible venue.
Finally, the public image and aura of arbitration will vary depending on perspective. In Western Europe, arbitration traditionally took the moral high ground, portrayed as an exercise in self-governance by the commercial community involving cooperation between the private sector (which conducted the arbitration) and the state (which enforced the award). In cross-border commerce, arbitration also was seen as providing a way for companies from different parts of the world to level the procedural playing field.
Common themes
Yet, notwithstanding its chameleon-like character, arbitration maintains a core essence. Litigants renounce the jurisdiction of otherwise competent courts in favour of a private and binding dispute-resolution mechanism. Arbitration institutions usually purport to promote equal treatment and basic notions of fairness. Arbitrators are expected to possess integrity, experience, and the ability to be both a good listener and a careful reader. In most cases, litigants also want their arbitrator to be intelligent, although at least one case comes to mind in which a lawyer sought to disqualify an arbitrator whose strong intellect made it unlikely that the lawyer’s client would succeed with its clever but spurious arguments.
The interaction of arbitration’s diversity of form and unity of essence brings to mind the elusive Greek sea-god Proteus, who had the gift of altering shape while his substance remained the same. Similarly, arbitration is constantly reinventing itself to adapt to each particular case and legal culture, while retaining a vital core which aims at final and impartial resolution of controversies outside national judicial systems.
B. Arbitral Discretion
The benefits of procedural autonomy
One reaction to arbitration’s protean nature has been an emphasis on broad grants of procedural discretion to the arbitrators. Arbitrators can conduct proceedings in almost any manner they deem best, as long as they respect the arbitral mission and accord the type of fundamental fairness usually called “due process” in the United States and “natural justice” in Britain, which includes both freedom from bias and allowing each side an equal right to be heard. Consulting the entrails of a disemboweled chicken might perhaps be off-limits. Negative attitudes about augury aside, however, very few constraints limit the manner in which arbitrators go about their jobs.3
The absence of precise procedural rules is said to constitute arbitration’s strength, by allowing the creation of norms appropriate to the contours of each dispute. Established dogma teaches that much of arbitration’s genius lies in giving carefully chosen individuals the freedom to apply just the right touch of this or that procedural principle—the je ne sais quoi of justice that leads to innovative and clever compromises. Like a bespoke tailor, the creative arbitrator cuts the procedural cloth to fit the particularities of each contest, rather than forcing all cases into the type of ill-fitting off-the-rack litigation garment found in national courts. While not totally false, this view is incomplete, as we shall see in a moment.
Two meanings of “rules”
This discretionary power exists not only in ad hoc proceedings, but also when the parties agree to a set of prefabricated institutional provisions, such as those of the International Chamber of Commerce (ICC) or the American Arbitration Association (AAA). Here we encounter a slight linguistic challenge. In arbitration, the term “rules” can bear at least two different meanings. First, there are stipulated frameworks of pre-set provisions (like the ICC or the AAA arbitration rules) that address matters related to the appointment of arbitrators and basic requirements of initial filings.4 Second, specific directives for conduct of the proceedings (in both fact-finding and legal argument) govern matters such as privilege and document production.
For better or for worse, rules in the first sense (prefabricated provisions) contain few rules in the second sense (canons for conduct of the proceedings), but leave the latter questions to the arbitrators. For example, the ICC Rules provide simply that the arbitrator may establish the facts by “all appropriate means.”5 Both the United Nations Commission on International Trade Law (UNCITRAL) and the AAA International Rules say that the tribunal may conduct the arbitration in “whatever manner it considers appropriate.”6 Even the London Court of International Arbitration (LCIA) Rules (which do a better job than most in transforming litigation practice into precise directives7) are explicit in giving the arbitral tribunal the “widest discretion to discharge its duties.”8
The same grant of discretion is found in modern arbitration statutes.9 Enlightened arbitration statutes today usually limit mandatory judicial review to matters such as bias, excess of authority, and gross procedural irregularity.10 In some cases they may also admonish the arbitrator to act with fairness and to adopt procedures suitable to the circumstances of the particular case.11
C. The Downside of Discretion
The need for default procedural protocols
The time has come to present this chapter’s tentative thesis, which with some simplification might be presented as follows: the benefits of arbitrator discretion are overrated; flexibility is not an unalloyed good; and arbitration’s malleability often comes at an unjustifiable cost.12 Therefore arbitral institutions should give serious consideration to adopting provisions with more precise procedural protocols to serve as default settings for the way arbitrations should actually be conducted. These directives would explicitly address questions such as documentary discovery, privilege, witness statements, order of memorials, allocation of hearing time, burden of proof and the extent of oral testimony.
The issue is not whether a model exists for a particular decision, but why one paradigm rather than another should prevail. While it seems almost axiomatic that parties themselves should be free to fashion their arbitration as they see fit, it is less evident that arbitrators ought to be in the business of setting norms for specific procedural questions on an ad hoc basis. For they may already have seen which side will be advantaged by one rule or the other.
This may not matter when all parties share or have adopted a common legal culture,13 or belong to a relatively homogeneous community that shares confidence in the individuals chosen to decide the case. Two Boston law firms arbitrating before a well-known Boston arbitrator would normally be expected to behave professionally and accept rulings that comport with their common range of expectations on matters such as witness sequestration and document production.
However, if backgrounds and experiences differ materially, the ad hoc imposition of procedures uncustomary to one side and not announced in advance, risks reducing the perception of arbitration’s legitimacy.14 The aggrieved party may then feel justified attempting to disrupt and derail the proceedings with charges of procedural unfairness.
Arbitral orthodoxy
To many in the arbitration community, any suggestion that arbitral discretion should be curtailed may be as welcome as ants at a picnic.15 The flexibility inherent in arbitrator discretion not only constitutes a pillar of orthodoxy,16 but rests on deeply entrenched practical considerations. Arbitral institutions that aspire to market their services globally are understandably shy about taking sides in long-standing debates between different national legal systems, particularly on those controversies that divide continental and Anglo-American civil litigation.17