Month: June 2020

BALANCING SPEED AND DUE PROCESS IN PRIVATE COMMERCIAL ARBITRATION

June 22, 2020

By: Atty. Julius Anthony R. Omila

 

Flexibility is a feature of the arbitral process, which makes it more attractive and advantageous than court litigation. As a party-driven process, the rules and procedure, including timelines, in the arbitration are agreed upon by the parties, especially in the Terms of Reference (TOR). When parties agree to institutional rules, the proceedings are governed by such rules.

Thus, parties are free to design the arbitral procedure to suit their specific cases. Absent the parties’ agreement, the arbitral tribunal can exercise its procedural discretion. Either way, the parties should be treated fairly and given a full opportunity to be heard.

So long as the parties are treated fairly, an arbitration can be tailored to meet the specific   requirements of the dispute, rather than having to be conducted in accordance with fixed rules of civil procedure. To this flexibility- and adaptability- of the arbitral process, must be added the prospect of choosing a tribunal which is experienced enough to take advantage of its procedural freedom. Such a tribunal should be able to grasp quickly the salient issues of fact or law in dispute. This will save the parties both time and money, as well as offering them the prospect of a sensible award. [Redfern and Hunter on International Arbitration 33 (5th Ed., Student Version, 2009)]

Such principles are found in the UNCITRAL Model Law, specifically Articles 18 and 19, which respectively provide:

Article 18. The parties shall be treated with equality and each party shall be given a full opportunity of presenting his case.

Article 19. (1) … the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings. (2) Failing such agreement, the arbitral tribunal may, subject to the provisions of this Law, conduct the arbitration in such manner as it considers appropriate.

Gary Born, a respected authority in international commercial arbitration, affirms that the arbitrators’ authority to determine the arbitral procedures is subject only to “mandatory protections of procedural fairness.” He quotes one U.S. court opinion:

Unless a mode of conducting the proceedings has been prescribed by the arbitration agreement … arbitrators have a general discretion as to the mode of conducting the proceedings and are not bound by formal rules of procedure and evidence, and the standard of review of arbitration procedures is merely whether a party to an arbitration has been denied a fundamentally fair hearing.

He adds,

The arbitrators’ procedural discretion under institutional rules is not unlimited. Rather, as with most national laws, institutional regimes subject the arbitrators’ procedural authority to overarching obligations to treat the parties fairly and to permit them reasonable opportunities to present their cases. [Gary B. Born, International Arbitration: Law and Practice150-51 (2012)]

However, the arbitral tribunal is generally mandated to conduct the arbitral proceedings expeditiously and in a cost-effective manner. Such inherent mandate of the arbitral tribunal is normally expressed in modern arbitration rules.

Time to render arbitral award

The UNCITRAL Rules of Arbitration, which is designed to apply in international ad hoc arbitrations, incorporates that principle:

Article 17 1. Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at an appropriate stage of the proceedings each party is given a reasonable opportunity of presenting its case. The arbitral tribunal, in exercising its discretion, shall conduct the proceedings so as to avoid unnecessary delay and expense and to provide a fair and efficient process for resolving the parties’ dispute. (Italics supplied)

The arbitration rules of modern arbitral institutions, including the Philippine Dispute Resolution Center, Inc. (PDRCI), also follow the same approach. Article 23 (1) of the 2015 PDRCI Arbitration Rules provides:

Subject to the Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and given a reasonable opportunity of presenting its case. The arbitral tribunal shall provide a fair and efficient process of resolving the dispute, avoiding unnecessary delay and expense.

To ensure the expeditious conduct of the arbitration proceedings and avoid unnecessary delay, the PDRCI Arbitration Rules also specifies in Article 42 (1) the period within which the arbitral award shall be rendered:

When there is more than one arbitrator, any award or decision of the arbitral tribunal shall be made within one (1) year from constitution of the arbitral tribunal by a majority of the arbitrators. If there is no majority, unless the parties agree otherwise, the award may be made by the Chair of the arbitral tribunal alone.

The reality of delay

Modern arbitration rules clearly take into account the reality that delay is not uncommon in arbitration.

In conducting the arbitral proceedings and to ensure the fairness of the arbitral process, the arbitral tribunal must consider, above all, the reasonableness, or lack thereof, of any possible delay that arises during the proceedings. To illustrate this point, I refer to my recent experience in two arbitrations where I sat as a member of the arbitral panel.

Upon the commencement of an arbitration proceeding, it is normally the claimant who is most prepared. Once it initiates the arbitration proceedings, the claimant is already armed with the theory of its case and knows beforehand not only the timing when it will initiate the arbitration but also everything else that is supportive of its case, such as the number and availability of its witnesses and pieces of evidence, among others. Claimant’s advantage is further emphasized when it is backed by a highly competent legal team who collaborates in the preparation of its case.

Once claimant commences the arbitration, the burden is shifted to respondent to address the claims against the latter. At times, respondent may not be able to anticipate if and when the claimant will actually initiate the arbitration. Thus, once arbitration is commenced against it, the respondent usually scampers in gathering witnesses and pieces of evidence to support its defense and counterclaims.

Delay sets in when respondent needs to locate key witnesses who are no longer available or connected with it. Vital pieces of evidence may not be that easily accessible as well.

Avoiding and resolving possible delays

In one international construction arbitration, the respondent Philippine corporation’s officers who were conversant with the disputed transaction were no longer in the respondent’s employ and already stationed abroad. Securing these former officers’ commitment to cooperate and help their former employer in the pending arbitration posed a difficult challenge to the respondent.

Also, ensuring the availability of those witnesses on specific hearing dates when respondent can no longer compel them to do so (the officers were no longer in respondent’s employ) posed an equally challenging task. There was also the practical yet very vital side of this issue—persuading those witnesses to faithfully recall, gather, and study vital pieces of evidence that will support respondent’s position in that arbitration, not to mention the incentive, or lack of it, on the part of these former officers to fully cooperate in the arbitration.

Thus, in that arbitration, respondent was prompted to request the panel of arbitrators that it be given enough time to require its former officers, who will now serve as its vital witnesses in the arbitration, to submit their witness statements and vital pieces of evidence, among others.

In effect, given its unique situation, respondent asked the arbitral tribunal to give it some leeway and time extensions, invoking its right to be heard and present its case. For its part, claimant objected by pointing out that the time extensions requested by respondent were too long and would cause so much delay in the arbitration.

The arbitral tribunal was thus faced with the task of balancing between expediting the arbitral proceeding and conducting it in such manner that the substantive and procedural rights of the parties, including the respondent, were not prejudiced.

In that case, the arbitral tribunal considered the respondent’s situation, found that respondent’s request for time extensions was reasonable, and granted it. Foremost, the arbitral tribunal found that the parties, especially the claimant, would be not be prejudiced if respondent were allowed more time to submit the written statements of its witnesses and its pieces of evidence.

Even if respondent’s request for time extensions were granted, the arbitral tribunal would still have enough time to prepare and issue its award within the period agreed upon in the TOR and the applicable institutional rules.

In another domestic arbitration administered by PDRCI, respondent corporation promised to produce on the last hearing date allotted to it the last set of evidence, consisting of documents that respondent would secure from the Bureau of Internal Revenue (BIR). On the scheduled hearing date, however, respondent failed to produce the promised documents and, instead, asked for one “last chance” to secure the documents from the BIR, citing that the documents were vital to its defense and counterclaims and that tedious government bureaucracy caused the delay in securing the BIR documents. Claimant vehemently objected, stating that respondent should deemed to have waived its right to produce the documents.

The arbitral tribunal found the grounds raised by respondent as “good reasons” and granted the latter’s request.

The arbitral tribunal considered these circumstances together: the hearings were not yet declared closed at that time and, in compliance with the PDRCI Rules, the tribunal had more than enough time to prepare and issue its award within the period agreed in the TOR. The claimant would likewise not be prejudiced if respondent were given additional time to secure the identified documents.

On the other hand, respondent would be prejudiced if it were not allowed to present its documents, which were vital to its defense and counterclaim. Thus, the tribunal accorded the respondent its right to be heard. As promised, respondent produced the promised documents on the next hearing date. Thereafter, with no further evidence from the parties, the arbitral tribunal declared the hearings closed.

The tribunal relied on Article 39 (1) of the PDRCI rules, which provides:

The arbitral tribunal may inquire of the parties if they have any further evidence to offer or witnesses to be heard or submissions to make and, if there are none, it may declare the hearings closed.

Most importantly, in both instances cited above, the arbitral tribunal considered the respondents’ procedural behavior and “good faith” during the proceedings, particularly the way respondents cooperated during the arbitral process.

Full opportunity to be heard

Equal treatment of the parties and full opportunity to be heard are both duties of the arbitral tribunal and a right of the parties, including the respondent, in the arbitration.

How “full” is full opportunity to be heard? How is it distinguished from “reasonable” opportunity to be heard, as may be found in some arbitration rules?

A commentary on Article 17 of the UNCITRAL Arbitration Rules is instructive on this point:

… the reference to a full opportunity naturally draws meaning in contradistinction to an incomplete opportunity. One would certainly not expect any difference in behavior between arbitrators called on to afford a full opportunity and those called on to afford a reasonable opportunity to present a case. Where reference is made to ‘full’, ‘reasonable’ or adequate’, the opportunity must be a complete one, allowing each and every tenable argument to be presented in an appropriate format. Whichever adjective is used, the intent is never to afford an unlimited opportunity as to timing, extent or manner of presentation of a case. (Clyde Croft, et. al., ­A Guide to the UNCITRAL Arbitration Rules, 2013, page 177; italics supplied)

Certainly, the expeditious conduct of the arbitration and resolution of the dispute cannot be done at the expense of the parties’, including the respondent’s, right to be heard.

About the author

Atty. Julius Anthony R. Omila is a PDRCI member. He is a Trustee of the Philippine Institute of Arbitrators (PIArb) and a member of the Chartered Institute of Arbitrators (CIArb). He is also the corporate secretary of the Philippine International Center for Conflict Resolution, Inc. (PICCR) and an accredited arbitrator of the Construction Industry Arbitration Commission (CIAC) and Wholesale Electricity Spot Market (WESM).

THE VARIOUS MODES OF RESOLVING DISPUTES

June 22, 2020

Disputes can be resolved in a variety of ways. For one, dispute can be resolved by the use of force. Hence, parties can go to war, use threat or intimidation in getting what they want. On the other hand, parties in a dispute can also invoke and assert their rights over the subject of their dispute. In this case, parties can avail of litigation, arbitration or adjudication as a mode of enforcing their rights. Another way of resolving a dispute is for the parties to the dispute to explore each other’s interests, pursue and agree on those matters which can possibly address those interests. In this instance, the parties can pursue negotiation, mediation or conciliation as modes of resolving their disputes.

Based on studies and experience, given the appropriate circumstances, negotiation is the safer and least costly among these modes of resolving disputes.

FACTUAL BACKGROUND:

Much has been written and reported about the West Philippine Sea Dispute between China, on the one hand, and the Philippines and other ASEAN countries on the other hand. The newspapers are also rife with reports about military buildups not only between China and the Philippines but also among other ASEAN countries who have their respective stakes in the ongoing dispute. China, on one hand, is reported to have conducted massive reclamation activities and have built artificial islands on various reefs, which are claimed by the Philippines and found within the latter’s exclusive economic zone. China also built major military airstrips in some of those artificial islands which it built. The Philippines, on the other hand, is steadfast in its position over the specific areas and reefs within its territory. It is also gradually upgrading its military capability in view of this.

Experts and analysts have put forward their respective views on how to handle and manage the subject dispute. Some propose that the Philippines pursue bilateral negotiation with China on account of the fact that the former is in no position to get entangled in an escalation of this territorial conflict between the two (2) countries. Others, however, see an obvious power imbalance between the parties such that proposing a negotiation between the Philippines and China will ultimately favor the latter at the end of the day. Most, if not all, agree that, given China’s military might, the Philippines is no match to China in a military confrontation. As matters stand, observers see an obvious dilemna on the part of the Philippines over this issue.

At present, the Philippines has pursued arbitration proceedings against China before the Hague wherein the arbitral tribunal has recently declared that it has jurisdiction over the Philippines’ claims of maritime entitlement over the disputed areas. The United States, among other states, is also asserting its rights of navigation over the same disputed areas to the consternation and objection of China. Many other states have expressed opposition to and condemnation over China’s reclamation activities in the disputed area.

ISSUE:

At the same time when China is freely occupying many reefs within the disputed area, building artificial islands therein and constructing military airstrips and installations in the said artificial islands, China also insists on bilateral negotiation with the Philippines as the only way for the dispute to be resolved. That China is the much stronger party in this case is also a given fact and the existence of a power imbalance between the parties to the dispute is undeniable.

With the foregoing as backdrop, should the Philippines negotiate with China over the subject dispute? Corollarily, did the Philippines make the right decision in not negotiating with China and, instead, by submitting the dispute to arbitration? Does the Philippines’ approach in handling this dispute find support under sound dispute resolution principles?

WHEN NOT TO NEGOTIATE

Robert Mnookin, a lawyer and the Chair of the Program on Negotiation, Harvard Law School, wrote a book entitled “Bargaining with the Devil: When to Negotiate, When to Fight”. In Chapter 5 of that book,  Mr. Mnookin studied the relationship between Great Britain and Germany prior to the time when the two (2) countries eventually became protagonists during World War II. In his research, Mr. Mnookin looked back to the time when Germany was then ruled by its expansionist Nazi government under Adolf Hitler while, on the other hand, Great Britain’s government  was headed by its then Prime Minister Neville Chamberlaim. At that time, Europe was being threatened by Hitler’s expansionist policy while all along Great Britain was actively pursuing a pre-war foreign policy of appeasement and avoiding war at all costs. Mr. Mnookin defined appeasement as “the policy of settling international quarrels by admitting and satisfying grievances through rational negotiation and compromise, thereby avoiding the resort to an armed conflict which would be expensive, bloody, and possibly dangerous.” Based on historical records which he studied, Mr. Mnookin discussed how Chamberlain went to great lengths to avoid confrontation with Hitler’s Germany. Chamberlain even met with Hitler and signed with the latter a treaty, which included Germany’s commitment not to invade territories in Europe. Germany, however, reneged on those commitments.

Winston Churchill then took over as prime minister of Great Britain at a time when Europe was helplessly facing the onslaught of Germany, which continued invading various countries in Europe to form part of its expanding empire. Great Britain was also faced with the threat of being drawn into a confrontation, or war, with Germany.

Robert Mnookin discussed that Great Britain’s leaders, under Winston Churchill, were faced with the most difficult issue at that time: whether or not to negotiate with Germany’s Adolf Hitler. Per Mr. Mnookin, Great Britain seriously considered negotiating with Germany since going to war against the latter would be a very costly option for the former. That posture was also consistent with sound dispute resolution principles, that is, go for the safer and less costly approach to resolving disputes if the circumstances will permit.

Did Great Britain, under Winston Churchill, eventually negotiate with Germany? No. Why? Based on available historical records studied by Mr. Mnookin, while Great Britain was considering negotiating with Germany and trying to avoid a confrontation with the latter, Germany was invading and annexing left and right countries in Europe to the point of threatening Great Britain’s independence. Looking at Germany’s pattern of behaviors at that time, Great Britain’s leadership concluded that Germany’s Hitler cannot be trusted and was a “completely unreliable negotiating partner”. Hence, Great Britain did not pursue negotiation with Germany.

One lesson or insight that Mr. Mnookin shares is this: As a general rule, always consider negotiation as a mode of resolving your dispute. Exception, don’t negotiate if your prospective negotiation counterparty is not a reliable counterparty.

Transposing that lesson now to the Philippines’ West Philippine Sea dispute with China, can the Philippines properly treat and consider China as a reliable negotiation counterparty given that China, while insisting that bilateral negotiation between it and the Philippines is the only effective mode of resolving their present dispute, is simultaneously and actively occupying the various reefs located within the disputed areas, building artificial islands and military installations therein?

RIGHTS- BASED APPROACH IN DISPUTE RESOLUTION

Instead of pursuing bilateral negotiations with China, which the latter has been insisting on all along, the Philippines has pursued arbitration proceedings against China before the Hague on the basis of the Philippines’ claims of maritime entitlement over the disputed areas. Does this move on the part of the Philippines find support under sound principles in dispute resolution?

As matters stand at the moment, there is apparently a huge power imbalance between China and the Philippines. China is now on its massive reclamation- spree of the many reefs found within Philippine territory subject of the dispute. The Philippines, likewise, is also not in a position, militarily, to deter or stop China from doing so. Given this situation, what else could be a good option for the Philippines?

It is submitted that in case of obvious power imbalance between the disputing parties, when one party cannot possibly expect to pursue its interests or have its interests respected by its counterparty,  negotiation cannot be a viable option. Instead, the “weaker” party, if it has stronger rights in that given situation, should pursue a rights-based dispute resolution approach. (Frank E. A. Sander; Lukasz Rozdeiczer, Matching Cases and Dispute Resolution Procedure, 2006 Harvard Negotiation Law Review)

In the Philippines’ case at hand, does it have stronger rights against China in the subject dispute? In pursuing arbitration, the Philippines obviously thinks so. As of the moment, while China refuses to acknowledge the tribunal’s jurisdiction, the same arbitral tribunal in the Hague has acquired jurisdiction over the subject dispute and will proceed to hear the merits of the Philippines’ claim as it continues with its proceedings.

THIRD PARTIES’ INVOLVEMENT IN THE DISPUTE

Faced with China’s overtly aggressive and hardline posture, the Philippine government is now pursuing a policy of modernizing and strengthening its military. Even then, however, the Philippines’ military capability pales in comparison with China’s firepower. Be that as it may, an adversarial confrontation, short of war, is definitely not a welcome option given that it is very costly in terms of loss of resources and lives.

However, we also find in the news that the United States (and Australia), among others, is asserting its “right of navigation” over the disputed areas. On the other hand, however, the US does not maintain exactly the same position or interest as the Philippines in the latter’s dispute with China. Likewise, the G7 nations, composed of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, as well as some ASEAN countries, were reported to have issued statements opposing and condemning the massive reclamation activities of China within the disputed area.

In cases of power imbalance between disputing parties, another good approach of the “weaker” party is to build alliances with third parties. Hence, the Philippines has found allies among the US and Australia, who are asserting their “rights of navigation” over the disputed area, and other states which oppose and condemn China’s reclamation activities within the disputed area.

The Philippines’ alliance-building efforts find support in sound dispute resolution principles. However,  related literature is also consistent to the effect that alliances are most effective to the extent that the interests of the parties in the alliance are fully aligned with each other. (Leigh L. Thompson, The Mind and Heart of the Negotiator) How the Philppines’ present “alliance” with the US and other states will impact the present dispute between the Philippines and China, as it evolves, is worth watching and studying.

CONCLUSION

The foregoing is the author’s simple understanding of the Philippines’ approach in handling its present dispute with China. The author hopes that his discussion has provided some clarity on the subject.

(Atty. Omila is a Partner in Soller & Omila Law Offices. He is a member of the Philippine Institute of Arbitrators (PIArb), the Chartered Institute of Arbitrators (CIArb) and the Phil. Dispute Resolution Center, Inc. (PDRCI). He is also an accredited arbitrator and mediator of the Wholesale Electricity Spot Market (WESM) and accredited arbitrator of the ADR Center for Negotiation, Mediation and Arbitration).

Atty. Julius Anthony R. Omila