When Eurotunnel sought £30m in compensation for losses incurred through illegal immigrants crossing the English Channel, damaging terminal buildings and causing disruption to services, it blamed both France and Britain: France for the Sangatte hostel fiasco, creating a so-called departure lounge for illegals and the UK for its apathy in resolving the situation.

Last year, an international arbitration tribunal convened in The Hague found in favour of Eurotunnel, with damages yet to be decided. The proceedings lasted over three years and cost several hundred thousand pounds, before the issue of quantum had even been decided. This is almost as long and as expensive as litigation, some might argue.

The case typifies everything that is good and bad about international arbitration. The word ‘international’ is of paramount importance, since the traditional courts remain the arena of choice for the vast majority of domestic commercial disputes in the UK and, indeed, in most jurisdictions. However, today’s global economy has ensured that trade is increasingly multi-national, and a neutral venue and impartial adjudicator can be crucial when cross-border commercial relations break down.

‘International arbitration has been growing steadily for ten years, and will continue to grow,’ says Gordon Bell, projects and construction partner and head of international arbitration at Pinsent Masons. ‘There is no real alternative. As a foreign investor in an emerging country, you wouldn’t get funding if your contract dispute resolution clause provided for a local court.’

The benefits of arbitration are widely acknowledged. It is flexible, meaning the parties control the process from the outset. It is confidential, a point often of extreme importance to global brands. The final outcome is both binding and enforceable, thanks to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which almost 150 countries are signatories. The arbitrator is not controlled by the state and, with luck, has specialist expertise not enjoyed by a court judge. And, sometimes most importantly, the process is speedier and cheaper than traditional litigation – in theory at least.

But a 2007 global survey of in-house counsel, conducted by PricewaterhouseCoopers (PwC) in conjunction with the School of International Arbitration at Queen Mary, University of London, found that 65% of counsel at leading companies had found arbitration to be more expensive than cross-border litigation. Some 52% of respondents estimated costs of £55,000 to £270,000 for their current arbitration proceedings, with 12% spending over £2.7m.

Expense claims

The issue of costs, alongside delay, is fast becoming the thorn in the side of international arbitration, with growing concern over cost awards that outweigh the substantive damages. Mark Hoyle, commercial arbitrator and barrister at Tanfield Chambers, is highly critical of protracted costs claims and unnecessary expenditure, having witnessed numerous such cases both as counsel and adjudicator.

‘One of the great things about arbitration is that both parties expect a commercial result – it is important there is a clear winner. So once you start to fudge the outcome with different costs arguments, you can end up with as much disagreement on costs alone as on the substantive claim,’ he says.

A mounting wave of criticism has risen which points to several factors driving up costs in arbitration hearings, with lengthy and unnecessary disclosure, and expensive expert witnesses cited as the worst culprits. ‘You see some cases that result in tens of thousands of irrelevant or marginal emails being requested’, adds Hoyle. ‘The arbitrator has to take a step back and ask: why do the parties want them and what is their purpose?’

According to Pinsent’s Gordon Bell, in the UK there is a tendency to take a traditional, litigious approach to arbitration, including extensive pleadings, protracted discovery, and lengthy witness and expert evidence. ‘As [legal] experts we have moved arbitration closer to what litigation is,’ he admits.

However, Bell is joined by other leading lawyers in pointing out that today’s international arbitrations have moved a long way from the typical trade dispute where arbitration has its roots, adjudicated by lay arbitrators who are specialists in their respective fields, for example, shipping, insurance, commodities and construction, where arbitration continues to be expeditious and cheap.

‘Arbitration is dealing with much larger disputes than 20 to 30 years ago,’ notes David Brynmor Thomas, international arbitration partner at leading dispute firm Herbert Smith. ‘What would be the cost if the same case were to be litigated? I’d say far more expensive again.’ A ‘long’ arbitration may well run to two weeks, but compared to a typical eight-week dispute in the courts, multiplied by the daily fee rates of counsel and solicitors at partner and junior level, not to mention hired experts, the difference can be huge.

Today’s international arbitrations are likely to be highly complex, involving multiple parties and mammoth pioneering projects, such as a new gas supply to a developing country. There is often a vast amount of money at stake, and the parties to the dispute simply do not want a cheap alternative to litigation, where documents and witnesses are not thoroughly examined.

Audley Sheppard is a partner in international law and arbitration at Clifford Chance, a leading firm in this arena, and is visiting professor at the School of Arbitration, Queen Mary, University of London. He says: ‘There are some arbitrations that are conducted totally disproportionately to the amount at stake, but it’s not correct to say that arbitration is too expensive across the board. Parties to sophisticated transactions, where claims run into hundreds of millions of pounds, do not want the dispute to be handled in such a way that the tribunal does not have time to fully consider the issues. Complex disputes do take longer and are more expensive than parties would like them to be, but this is unavoidable, with good reason. It’s about finding a balance.’

Tony Marks, director of legal services at the Chartered Institute of Arbitrators (CIArb), observes: ‘I accept that, in those [complex] cases, arbitration can be long and costly, but there is no other way of resolving them. Leading international arbitrators are concerned to ensure that arbitration proceedings are conducted expeditiously and aim to conclude cases within 12 months of appointment where possible.’

Expert analysis

Another regular complaint in international arbitration is the cost of expert witnesses, especially those brought in to advise on quantum once liability has been established. As in litigation, both parties to the dispute will instruct an expert apiece, who then go head-to-head via both written reports and oral evidence. The parties decide the questions to be put to the expert, where arguably the arbitrator, who is the ultimate decision-maker, should set the agenda for the experts. ‘The arbitrator should ultimately decide what questions need to be answered by the expert, because some questions do not help in deciding the issues,’ argues Hoyle. ‘The arbitrator ought to set the boundaries for the experts, because a skilled arbitrator will know by the end of his reading of the materials what the issues are.’

Others say the parties bring these costs on themselves. The experts defend their role, and fees, in arbitration proceedings as being something clients actively need and seek out. James Nicholson is a principal at LECG, the global expert and consulting services company. He specialises in economics and finance, and has given evidence on quantum at international disputes at the highest level. ‘The important thing about being an expert is that, although we are hired and paid by one side, our duty is to the tribunal. We are there to help the tribunal decide the issues, not to suit one of the parties,’ he points out.

And like the lawyers at the reins of the arbitrations, he too argues that, in cases where vast sums of money are in dispute, it is the clients themselves that demand detailed analysis and argument over quantum: ‘There is often a large amount of money at stake and arguing quantum can be key. There can be very large differences of opinion between experts, so although the bills of damages experts are sometimes significant, it can be money that is repaid many times over in the final awards. And in almost all instances, the amount is significantly less than the legal teams cost.’

One of the fundamental principles of arbitration is flexibility – the parties to the dispute take control over procedure, deciding everything from location of the tribunal (England, Switzerland, France and the US are the most common), to discovery and timetable. As Audley Sheppard describes it, clients can choose between the Rolls Royce or the Ford Mondeo of arbitrations.

Herbert Smith’s Brynmor Thomas points out that clients are choosing to instruct the same firm for their arbitration as they would for a large litigation because they demand equal quality in terms of expertise and service.

But there is not a client in the land who would not want to spend less on resolving disputes. In the past twelve months a number of professional bodies and institutions have set about tackling the issues of cost and delay in arbitration, such as the International Chamber of Commerce (ICC)’s Commission on Arbitration and its report on control of cost and duration. Among its suggestions are the simplification of arbitration agreements, holding early case management conferences, the use of telephone and video conferencing and the need to identify the issues at an early stage to bring into focus disclosure, witness statements and experts.

A common strategy to deal with costs is the bifurcation of liability and damages, so that time and money is not wasted arguing quantum if the claim should fail. But the decision to split the issues is often based on legal tactics, so is dependent on each individual case. And experts such as Nicholson at LECG point out that liability and damages are often too closely intertwined to separate.

Another initiative is witness conferencing, where experts can be cross-examined simultaneously, which has been shown to highlight the key issues of the dispute more expeditiously. Next month LECG is sponsoring the Foundation for International Arbitration Advocacy training course in Lausanne on the questioning of expert witnesses, which will focus on witness conferencing.

But despite all this, the PwC survey of corporate attitudes to international arbitration concluded that demand for arbitration is growing, and that ‘the advantages clearly outweigh the disadvantages'. As Hoyle at Tanfield Chambers says: ‘Where you've got a good, well-run tribunal, the whole thing runs like clockwork.’

Kate Durcan is a freelance journalist