The New York Times has just published a three-part series of investigative articles about arbitration practice in the United States, casting it as machine of repeat-players used by large companies to deprive ordinary citizens of access to justice.

It is a pity the writers did not look deeper under the hood of that machine. Had they done so, they would have found that many large companies, my own included, have for years lamented many of the same issues and called for greater efficiency, transparency, and accountability in arbitration. Similarly, in his 2012 ICCA address, Chief Justice Sundaresh Menon (an esteemed international arbitrator) also expressed the urgent need for an international self-regulatory regime to pursue these goals.

In many countries, including the United States, arbitration has grown not because it is the best possible solution, but because it is perceived as a lesser of evils compared with what courts have to offer. In the USA, litigation can be both unpredictable and uncontrollably expensive for parties on both sides. The idiosyncrasies of American civil justice include an elected judiciary (and wide variability of quality) in state courts, juries of lay citizens in civil cases, the threat of disproportionately high punitive damages, class actions (collective redress), high costs of discovery, contingency fee arrangements, and the absence of fee-shifting towards the prevailing party.

This “American exceptionalism” can make access to the courts illusory even for an average citizen. Unsurprisingly, it also creates pressure on businesses to find affordable and reliable alternatives instead of just passing the costs of litigation onto consumers. As a result, domestic US arbitration now booms with many types of claims that are simply not considered arbitrable under the procedural laws of other countries. As the New York Times describes with several troubling examples, employment cases are arbitrable in the USA, as are consumer disputes even where the arbitration agreement is contained in a contract of adhesion.

Hopefully the arbitration community will embrace and address the criticisms rather than argue against change. As an initial step, the arbitration community needs to find a way to cast aside the illusory cloak of confidentiality (“secrecy”, as it is now often called) and publish arbitral awards and information about arbitrators’ past performance.*

But fostering transparency is not enough for arbitration to receive the respect accorded other professions. This would require the additional steps of:

• standards of competency;
• certification and licensing;
• disciplinary codes; and
• independent regulatory or supervisory bodies.

The alternative to meaningful self-regulation will most likely be regulation imposed legislatively. There are already examples of this in the United States. California has enacted a legislative response to perceived failings in arbitration, and the US Congress is considering the Fairness in Arbitration Act. Both of these initiatives take aim at issues that could have been addressed through enforceable ethical standards or rules governing the conduct of arbitrators.

It is up to the arbitration community whether to seize the initiative or to let regulation be imposed by others. In either event, a regulatory regime would not be a radical change; on the contrary, it would establish arbitration as a modern profession, like any other.

Just two centuries ago, medical treatment was delivered in the USA by a variety of people who held themselves out as doctors. A series of abuses led to the more serious-minded in the profession to create and implement educational and competency standards, and licensing, in the middle of the 19th century. Although this is a relatively recent development, no reasonable person today would consider using a doctor who lacks a license attesting to her or his professional competency.

As discussed previously here, mediation, as another “alternative” to court litigation, may offer a useful foundation on which to build an arbitration regulatory scheme. The International Mediation Institute, or IMI (www.IMImediation.org) was launched just seven years ago. It provides no services of any type and is instead dependent for its existence on donations (including from my company) and mediator registration fees. With its minimal budget, IMI has introduced certification requirements, standards, and disciplinary codes of conduct that are now in use around the world. IMI also publishes feedback from parties who have used IMI certified mediators, both positive and negative.

Arbitration has no equivalent of IMI, at least not yet.

This model could be easily adapted to suit the differences in arbitration practice, both domestic and international.

The fix for the US litigation system, by contrast, presents a broader and far more difficult challenge.

* For example, Prof. Catherine Rogers has published here on Kluwer a proposal – already in implementation – to bring about more transparency through the Arbitrator Intelligence project.

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12 comments

  1. I entirely agree with Mike. Rather than defending blindly, the arbitration community should take this an apportunity to improve the arbitration system. The Times article infact did point out some grave anomalies which need immediate focus. An arbitration certifying institute similar to IMI could create an impact.

  2. Thanks for sharing this.
    I believe you are right: the arbitration community should lead the “self regulatory” process.
    However, I really don´t know if the arbitration community is ready or, better, if is willing to go for it — picking your “medical” example of the US two centuries ago, I wonder what the reaction of the community would be if they had the communication technologies available today … It had to be imposed by law, that’s what History tells us.
    I am starting to believe that regulation will only arrive with broad acceptance and enforcement if done through international bodies like UN, that nearly six decades ago boosted an international instrument governing arbitration throughout more than 150 countries now …
    Perhaps a New York Convention for International Standards in Arbitration?

  3. I am not sure whether ‘professionalisation’ is the solution rather than the problem. For centuries, it was the custom for arbitrators to be drawn from many walks of life but particularly from the Law.

    They did what was asked of them and then returned to the day job. Some large companies gave arbitrators leave to spend one or two days gratis.

    The huge fees and long cases were the exceptions; now they’re the rule.

    1. Sorry, but I don’t buy the “argument from antiquity”. For centuries, people also sought medical treatment from shaman, village wise men, and even Shakespeare’s father (who diagnosed his patients based on the color of their urine). And most of them lived to a ripe old age that was less than half the average today, not to mention the even more striking infant mortality rate, which in the middle of the 1800’s was several hundred percent higher than it is now.

      Business today is different than it was even 20 years ago, and is constantly changing. It should not come as a shock to arbitrators that business users want them to adapt to these changes rather than return to the past.

    1. For true regulation, one would have to ask: what are the consequences to an arbitrator of violating any of the CIArb guidelines? Loss of license or certification that prohibits or severely limits their ability to act as arbitrators?

      The same could be said of the various IBA guidelines. Breaking them might have consequences in the same arbitration, or with the institution administering it, but not beyond.

      Without an enforcement mechanism with teeth, then my view is that these are all positive steps, but no, they are not the sort of regulation that would place arbitration on a regulatory footing similar to other professional bodies.

  4. I read somewhere that abuse in the medical profession didn’t stop until the principle took hold, that TREATMENTS should be judged, and only judged, by their efficacy and not by the very good professional reputations of the DOCTORS who delivered them. {:-o

  5. Thank you, Mike, for your excellent consideration and suggestions. Doesn’t, however, self-regulation within such a dispersed industry (especially if we follow your line and understand the collective interest cry, expressed in the article) pose the risk of sending us back to the Gilded Age?

    Also, the article seemed influenced by the idea of jury trial (or popular trial), which confronts the idea of “specialized dispute resolution mechanisms”, which was at the core of the origins of arbitration.

    The problem seems to be real (and not only in the US, as e.g. in Brazil the discussion is ongoing mainly due to the incapacity of the Justice System to deliver) and urgent. Holding regular venues with different views and interests seems a good idea to start addressing where (and how) should discipline come from.

  6. While I usually agree with everything Mike says, this time I respectfully dissent.

    First, the New York Times, which I read everyday, is the last place I would expect to find a fair and balanced report of anything. One might conclude, for example, that labor claims are arbitrated because the lords of the universe keep labor in shackles, but the simple fact is, all labor agreements – at the behest of labor unions – require arbitration of labor disputes. And in the school systems of this country that is one reason why it is nearly impossible to move educators who are incompetent or worse out of the schools. In my state, arbitration clauses in typical consumer contracts that are unconscionable are unenforceable.

    Second, the thrust of this “expose” was domestic arbitration, not international commercial arbitration, and I for one do not accept that this community is in fact guilty on an institutional or systemic basis of the various transgressions attributed by the NYT.

    Lastly, those who arbitrate do so because they chose to, and one beauty of the system is you can arbitrate it any way you choose. The NYT comes from the point of view that they know better than the rest of the unwashed.

    So, while as with any human endeavor, our structures are not perfect and can be improved, international commercial arbitration is by far better suited to resolve disputes that arise across cultures and legal traditions.

  7. Does the international arbitration community play no role in spreading consumer arbitration? For example how did arbitration in Shanghai become the dispute resolution forum for MyStarbucksRewards (the Starbucks China consumer loyalty card)?

    A very comment-worthy blog, Mike.

  8. I think one element has been de-emphasized in the paper and in some of the subsequent comments. Certain parts of the society view arbitration as a tool primarily serving the business community (as the author seems to agree) to avoid perceived excessive litigation costs by bypassing traditional judiciary procedures. The latter have traditionally been trusted as guarantors of our constitutional rights and there is a concern that judiciary power is increasingly delegated to unelected individuals, operating, at least in some cases, outside the immediate supervision of directly elected legislators.
    I would respectfully disagree with suggestions that modelling future arbitration following the example of the health industry should comfort the public. I am referring to the paragraph in the main article where medicine was taken as a favorable example of areas where professional bodies seized initiative before being subjected to legislation imposed by the public.
    First, an organized and consolidated professional body does nothing to allay fears that justice is delegated to unelected professionals, whose vested interests have the potential to bias important decisions. And second, the system where AMA self-regulates and largely runs the trade is not a good performer both in terms of patient care or economic efficiency. That system has certainly been good at protecting interests of medical and pharmaceutical professionals whose incomes level is significantly above other OECD countries, but far more expensive to run by an order of magnitude and, way too often, achieving worse results compared to centrally run systems elsewhere in the developed world where decisions are imposed by elected officials. Arbitration may need to follow a different path if efficiency is one of the main reasons for which it became necessary.

  9. Ralph, it’s interesting to read your comment. ICC ‘supervisors’ or counsel, as they’re called, have hands-on involvement in cases, and the work of the ICC Court is confidential in nature. However, it appears that the ICC has not explained the detailed internal workings of its procedures to you: therefore, your response to your experience of arbitration has been to your overall impression of how the ICC acts. Thanks for your comment Ralph. I wonder what other readers think of the marketing and communications strategy adopted by the ICC in this case, given Ralph’s reaction to it and the possible broader impact of his comments on the arbitration community.

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