The Chief Justice of Singapore cautions on the issues arising from dramatic growth of new entrants, third-party funding and rising costs in international arbitration.
At the Chartered Institute of Arbitrators International Arbitration Conference held in Penang on 22 August 2013, which I had the pleasure of attending, The Honourable The Chief Justice Sundaresh Menon delivered his keynote address entitled “Some Cautionary Notes for an Age of Opportunity.”
Chief Justice Menon highlighted the essential role that arbitration plays in the global infrastructure and in the development of an international rule of law. However, he cautioned that how successfully this Titanic continues to sail ahead would depend on the diligence of its stewards in spotting and reacting to the approaching icebergs.
He identified three distinct issues which he believed the international arbitration community needed to take cognizance of.
1. Dramatic growth in number of new entrants
The first was the “explosive growth in the number of new entrants to the global arbitration community, many from diverse legal traditions“. The result, he feared, was that: “[i]mplied understandings or shared values no longer provide any meaningful means of shaping or influencing conduct in this context. Arbitrators can no longer consider themselves bound by peer standards, because there are no peers in the true sense, amidst all this diversity.”
Chief Justice Menon posed the question as to what yardstick should be applied in the present setting of a largely unregulated industry with little, if any, barriers to entry. Drawing an analogy from sports, “[i]f football were played without rules but with massive stakes and rewards, how would we condemn those playing the man instead of playing the ball?’
2. Third-Party Funding
The second issue was “the growing incidence of third party funding and the participation of funds in international arbitration” and the “virtual absence of any form of regulation” in contrast to third party funding for litigation.
Chief Justice Menon gave examples of a European gas company announcing that a Luxembourg fund would finance its €1 billion ICSID claim and of a Canadian mining company having made an agreement with a third-party funder to cover the costs of a multi-billion arbitration claim brought by its subsidiary against Bolivia.
In particular, he touched on how the prevalent use of third-party funding in international arbitration has seen the emergence of a market for the sale of the payment obligation that will be owed by the claimant in the event of success, as a chose in action to third-party speculators. Such practices are reminiscent of and have the potential to replicate the vulture funds that were prevalent in the 1990s.
Would funders create a portfolio of high risk claims, consisting of frivolous or unmeritorious claims, hedged by low risk claims, consisting of claims with a good chance of success, and sell them as a diversified basket of claims to third-party speculators? This would make it possible to profit from frivolous and unmeritorious claims that would not otherwise have a market with speculators if they were sold individually.
3. Rising Cost
Finally, Chief Justice Menon raised the issue of the rising costs of international commercial arbitration and warned that there was a “growing recognition amongst users that the level of costs in international arbitration is rising at an unsustainable rate“.
While he acknowledged the various reasons for such rising costs, he stated that it was “unsatisfactory that the international arbitral community has not acted with dispatch to address this issue. On the contrary, the trend might even point somewhat the other way“.
4. Possible Responses to these Challenges
Chief Justice Menon suggested two ways to combat these three issues.
The first is to develop and implement codes of ethics to set uniform standards for both arbitrator and counsel conduct. He then proceeded to distinguish the common arguments in opposing the implementation of such a uniform code.
The second is for arbitral institutions to play a larger role in developing and implementing a regulatory framework to apply and enforce such standards.
This speech completed a trilogy of views expressed by Chief Justice Menon on the topic of international arbitration. The first were the views expressed in his keynote address at the 21st International Council for Commercial Arbitration Conference on 11 June 2012 which were then expanded on at the seminar at Queen Mary, University of London on 27 September 2012.