"What's the point?" asked the preacher, rhetorically.
"Vanity of vanities, all is vanity" was his text, taken from Ecclesiastes, an Old Testament book apparently attributed to Solomon, whose wisdom we have all heard about over the years. The child and two women each laying claim to being the mother - and all that.
What profit has a person from their labour when the sun rises and falls, the wind comes and goes, the rivers run to the sea? There is, says Solomon,
"nothing new under the sun". All is vanity. What's the point?
The preacher had his theological point of course. But even if we leave that aside, what is the purpose of our striving? What are we seeking to achieve? For whom?
Our visit to a church in an island community on the outer edges of Scotland coincided with me also reading Victor Frankl's "Man's Search for Meaning", his visceral account of life, of survival, in Nazi concentration camps. I often quote Frankl at the start of our flagship mediation training courses:
"Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom."
That observation sits well in a challenging training environment. But what lies beneath Frankl's search for meaning? He said this of "success":
"Don't aim at success - the more you aim at it and make it a target, the more you are going to miss it. For success, like happiness, cannot be pursued; it must ensue, and it only does so as the unintended side-effect of one's dedication to a cause greater than oneself...." Frankl draws on Nietzsche: you can bear with almost any "how" if you have a "why". And for each of us it is different:
"No man and no destiny can be compared with any other man or any other destiny."
Our preacher summarised our searching by reference to a song by the Irish band U2:
"I still haven't found what I'm looking for". Or as Daniel Klein puts it, in his book with this title, "Every time I find the meaning of life, they change it." It could get worse. Our great Scottish philosopher, David Hume, considered that:
"The life of man is of no greater importance to the universe than that of an oyster." What, therefore, is the point?
The other day at the Edinburgh Book Festival, I was sitting with Alastair McIntosh, that modern Scottish prophet. Alastair was ruminating about climate change. "I just don't see a solution" he said. We agreed that all we might now be able to do is ask questions and explore options. We also agreed that grand schemes and great fixes may elude us. Perhaps all we can do is do all we can with and for those near to us, we concluded. Maybe that is the point - and that there is a point in that.
Remarkably, in the book by Klein referred to above, he cites Frankl:
"Live as if you were living a second time, and as though you had acted wrongly the first time." Wise words indeed. What might that mean for those of us who are mediators, often pursuing a second career? What is our purpose? Our cause? Our
why? How do we define "success"? How do we find what we are looking for?
My good friend, and fellow Kluwer blog poster, Charlie Woods, speaks of our role as guerrilla gardeners, sowing seeds and not knowing where or what might bear fruit. "Have a plan," he says, "and play it by ear". Improvise, be fleet of foot, don't expect to see a return on all your efforts. Funnily enough, the writer of Ecclesiastes said something similar:
"In the morning sow your seed, and in the evening do not withhold your hand; for you do not know which will prosper..."
End note: Since writing this, I have read
Ian Macduffâ€™s post on 26 August 2019. There is perhaps a theme emerging.
The U.S. 9th
Circuit Court of Appeals
(Monster Energy Company, v. City Beverage, LLC (doing business as Olympic Eagle Distributing) (9th
Cir. Nos. 17-55813, 17-55082, October 22, 2019, available on TDM at
https://www.transnational-dispute-management.com/legal-and-regulatory-detail.asp?key=23124, subscription only) today vacated an arbitration award by a sole JAMS arbitrator in a U.S. domestic commercial arbitration administered by JAMS. The appellate panel held (2-1, majority opinion authored by Judge Milan Smith and dissent by Judge Michelle Friedland) that the failure by a JAMS arbitrator to disclose that he was an owner-shareholder in JAMS and JAMS' "non-trivial business dealings" (i.e., prior arbitrations JAMS had administered) with one of the disputing parties (Monster Energy) in a JAMS arbitration justified vacatur of the resulting arbitration award for "evident partiality" under the Federal Arbitration Act (FAA).
Circuit appellate] panel held that before an arbitrator is officially engaged to perform an arbitration, to ensure that the parties' acceptance of the arbitrator is informed, arbitrators must disclose their ownership interests, if any, in the arbitration organizations with whom they are affiliated in connection with the proposed arbitration, and those organizations' nontrivial business dealings with the parties to the arbitration. In this case, the arbitrator's failure to disclose his ownership interest in JAMS, coupled with the fact that JAMS has administered 97 arbitrations for Monster over the past five years, created a reasonable impression of bias and supported vacatur of the arbitration award.
While it is tempting to think the implications of this decision are limited to the unusual for-profit arbitral organization like JAMS, it is entirely possible that advocates will seek to extend the majority opinion's underlying principles to relationships between an arbitrator and her law firm or an arbitrator and a non-profit arbitral organization.
Many in the international arbitration community, and most American arbitration practitioners, will of course be familiar with JAMS, a leading U.S. arbitration organization which states that it is "the world's largest private alternative dispute resolution (ADR) provider." For those not familiar, it is fundamental to the 9thCircuit ruling that JAMS is a
www.jamsadr.com), in contrast with the AAA/ICDR, the ICC and other non-US international arbitral institutions which are non-profits. Some, but not all, of the mediators and arbitrators on the JAMS roster are "owner-shareholders" entitled to share in the profits of the organization from JAMS' share of the billings of its mediators and arbitrators and from ADR services provided by JAMS such as administration and hearing room rental.
The underlying arbitration involved a dispute as to whether Monster Energy, an energy beverage producer, had properly terminated its distribution agreement with City Beverage, referred to in the opinion as "Olympic Eagle." The arbitration clause in the agreement specified JAMS arbitration, and the disputing parties selected their sole arbitrator (the Honorable John W. Kennedy, Jr., a retired California State court judge) from a list of JAMS arbitrators provided by JAMS. The arbitrator ruled in favor of Monster Energy in the arbitration. Olympic Eagle then sought vacatur of the award in the U.S. District Court for the Central District of California.
In doing so, Olympic Eagle argued among other matters that the award should be vacated under the FAA on grounds that the arbitrator's failure to disclose his status as an owner in the JAMS structure or the quantity of prior arbitrations involving Monster that had been administered by JAMs constituted "evident partiality." The District Court rejected Olympic Eagle's vacatur efforts and instead confirmed the award in favor of Monster Energy.
On appeal, the 9th
Circuit appeals panel reversed and vacated the arbitration award for "evident partiality" under 9 U.S.C. § 10(a)(2).
We conclude, given the Arbitrator's failure to disclose his ownership interest in JAMS, coupled with the fact that JAMS has administered 97 arbitrations for Monster over the past five years, that vacatur of the Award is necessary on the ground of evident partiality. We therefore reverse the district court and vacate the Award.
The Court of Appeals was unpersuaded that retired Judge Kennedy had satisfied an obligation to disclose his ownership interest in JAMs, despite the Judge having made the following disclosure at the time of his arbitral appointment.
I practice in association with JAMS. Each JAMS neutral, including me, has an economic interest in the overall financial success of JAMS. In addition, because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals who practice with JAMS has participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future.
At the District Court level, Olympic Energy asserted that Judge Kennedy's status as a JAMS owner-shareholder was "later discovered information" entitling Olympic Energy to obtain underlying information from Judge Kennedy and from JAMS. The arbitrator and JAMS resisted further disclosure.
Olympic Eagle sought to vacate the Award based on later-discovered information that the Arbitrator was a co-owner of JAMS-a fact that he did not disclose prior to arbitration. Olympic Eagle also requested information from JAMS regarding the Arbitrator's financial interest in JAMS, and Monster's relationship with JAMS. When JAMS refused to divulge this information, Olympic Eagle served JAMS with a subpoena. In the face of further resistance, Olympic Eagle later moved to compel JAMS's response to the subpoena.
The appellate majority first found that Olympic Energy had not waived its right to assert the "evident partiality" vacatur ground. The lower court had previously ruled that "Olympic Eagle waived its evident partiality claim because it failed to timely object when it first learned of potential "repeat player" bias and the Arbitrator disclosed his economic interest in JAMS."
For the appeals court, the "key issue" with respect to the waiver claim was properly posed as "whether Olympic Eagle had constructive notice of the Arbitrator's potential non-neutrality." Judge Smith, for the majority, concluded that Judge Kennedy's disclosure of an economic interest in JAMS was insufficient in the circumstances. His disclosure statement "implied only that the Arbitrator, like any other JAMS arbitrator or employee, had a general interest in JAMS's reputation and economic wellbeing, and that his sole financial interest was in the arbitrations that he himself conducted." Accordingly, "even if the number of disputes that Monster sent to JAMS was publicly available,"which it apparently was not, that data "would not have revealed that this specific Arbitrator was potentially non-neutral based on the totality of JAMS's Monster-related business."
We find that Olympic Eagle lacked the requisite constructive notice for waiver. To be sure, it knew that the Arbitrator had some sort of "economic interest" in JAMS. But the Arbitrator expressly likened his interest in JAMS to that of "each JAMS neutral," who has an interest in the "overall financial success of JAMS." The Arbitrator also disclosed his previous arbitration activities that directly involved Monster, in which he ruled against the company. In context, these disclosures implied only that the Arbitrator, like any other JAMS arbitrator or employee, had a general interest in JAMS's reputation and economic wellbeing, and that his sole financial interest was in the arbitrations that he himself conducted. Thus, even if the number of disputes that Monster sent to JAMS was publicly available, that information alone would not have revealed that this specific Arbitrator was potentially non-neutral based on the totality of JAMS's Monster-related business.
The Court also relied upon the arbitrator's duty to investigate and disclose potential conflicts.
Furthermore, we have repeatedly emphasized an arbitrator's duty to investigate and disclose potential conflicts. **** The Arbitrator undoubtedly knew of his ownership interest in JAMS prior to arbitration yet failed to disclose it. To find waiver in this circumstance would "'put a premium on concealment' in a context where the Supreme Court has long required full disclosure."
After rejecting Monster Energy's waiver argument, the Court of Appeals then turned to determining whether the withheld information justified a conclusion of "evident partiality" under the FAA. Like other 9thCircuit rulings in the past, this appellate panel looked tointer alia the portion of the U.S. Supreme Court'sCommonwealth Coatingsdecision that referred to a "might create an impression of possible bias" test for "evident partiality," as well as the reference to a "substantial interest in a firm which has done more than trivial business with a party"in Justice White's opinion inCommonwealth Coastings. The appeals majority also referrenced the holding from theen banc5thCircuit ruling inPositive Software Solutionsthat "long past, attenuated, or insubstantial connections between a party and an arbitrator" do not compel set-aside of the award, a holding adopted by the 9thCircuit in its 2010Lagstein v. Certain Underwriters at Lloyd's, London decision.
The Supreme Court has held that vacatur of an arbitration award is supported where the arbitrator fails to "disclose to the parties any dealings that might create an impression of possible bias."Commonwealth Coatings Corp. v. Cont'l Cas. Co., 393 U.S. 145, 149 (1968). In a concurrence, Justice White noted that when an arbitrator has a "substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed," id. at 151-52 (White, J., concurring)-a formulation of the rule that we have adopted. See, e.g.,New Regency, 501 F.3d at 1107. By contrast, we have observed that "long past, attenuated, or insubstantial connections between a party and an arbitrator" do not support vacatur based on evident partiality.Id.at 1110; see alsoLagstein v. Certain Underwriters at Lloyd's, London, 607 F.3d 634, 646 (9th Cir. 2010)....
As OGEMID/YO readers will be aware, the Circuit Courts of Appeal in the U.S. are split on whether the "impression of possible bias" test or an alternative, more rigorous test, is the proper standard for FAA vacatur based on arbitrator non-disclosure.
Applying these precedents, the Court asked itself whether Judge Kennedy's ownership interest in JAMS was "sufficiently substantial" and whether JAMS and Monster Energy "were engaged in nontrivial business dealings."
Our inquiry is thus two-fold: we must determine (1) whether the Arbitrator's ownership interest in JAMS was sufficiently substantial, and (2) whether JAMS and Monster were engaged in nontrivial business dealings. If the answer to both questions is affirmative, then the relationship required disclosure, and supports vacatur.
The majority had little difficulty concluding that the Arbitrator's interest was "substantial" and the business between JAMS and Monster Energy was "nontrivial."
First, as a co-owner of JAMS, the Arbitrator has a right to a portion of profits from all of its arbitrations, not just those that he personally conducts. This ownership interest-which greatly exceeds the general economic interest that all JAMS neutrals2naturally have in the organization-is therefore substantial. Second, Monster's form contracts contain an arbitration provision that designates JAMS Orange County as its arbitrator. As a result, over the past five years, JAMS has administered 97 arbitrations for Monster: an average rate of more than one arbitration per month. Such a rate of business dealing is hardly trivial, regardless of the exact profit-share that the Arbitrator obtained.3
2Indeed, only about one-third of JAMS neutrals are owner-shareholders.
Interestingly, the 9thCircuit concluded in footnote 3 that it did not require empirical evidence of Judge Kennedy's personal monetary interest in the arbitrations involving Monster Energy.
Although the record does not reveal the Arbitrator's specific monetary interest in Monster-related arbitrations, we do not require such empirical evidence to conduct the triviality inquiry. SeeNew Regency, 501 F.3d at 1111 (finding that a "high-profile" project was not unimportant, even though "the record [did] not allow us to place a dollar value" on it);Schmitz, 20 F.3d at 1044, 1048 (finding generally that an arbitrator's firm's representation on nineteen cases in 35 years resulted in impression of impartiality).
The Court further rejected any distinction between an arbitrator's interest in his own "arbitration service" and other entitities.
We acknowledge that previous cases did not address an arbitrator's interest in his own arbitration service. Nonetheless, the Court did not distinguish between an arbitrator's organization and other entities, nor do we see any reason to insulate arbitration services from the principles that the Court articulated [in]
Additionally, Judge Smith's majority opinion turned to the movement in several States within the 9thCircuit to require more detailed disclosure from arbitrators sitting in arbitrations governed by State law. Of course, the role of State arbitration law disclosure requirements may not be applicable in arbitrations subject to the FAA, but the Court found comfort in the rigor of the State-mandated disclosure duties. That portion of the 9thCircuit opinion is worth quoting more fully, to illustrate the influence of the move in State legislatures and under the Revised Uniform Arbitration Act.
Some states within our circuit have already legislated extensive requirements for neutral arbitrators to ensure full disclosure. In California, for example, arbitrators are required to disclose "all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be impartial," including the "existence of any ground specified in [Cal. Civ. Proc. Code § 170.1] for disqualification of a judge." Cal. Civ. Proc. Code § 1281.9(a). Similarly, Montana requires arbitrators to disclose "all matters that could cause a person aware of the facts underlying a potential conflict of interest to have a reasonable doubt that the person would be able to act as a neutral or impartial arbitrator," including any ground for the disqualification of a judge. Mont. Code Ann. §§ 27-5-116(3)-(4).
In addition, under the Revised Uniform Arbitration Act (the RUAA), which has been adopted by several states in our circuit, an arbitrator must disclose "any known facts that a reasonable person would consider likely to affect the impartiality of the arbitrator," including a financial interest in the outcome of the proceeding. See, e.g., Or. Rev. Stat. Ann. § 36.650(1)(1). The RUAA also establishes a presumption of evident partiality when the arbitrator does not disclose a "known, direct and material interest in the outcome of the arbitration proceeding or a known, existing and substantial relationship with a party . . . ." See, e.g., Ariz. Rev. Stat. Ann. § 12-3012(E).
In the states that have enacted the referenced measures, arbitrators currently operate under disclosure rules akin to, or more burdensome than, the easily satisfied obligations we set forth here. Fundamentally, these disclosure requirements safeguard the parties' right to be aware of the relevant information to assess the arbitrator's neutrality.
Finally, the 9thCircuit noted that Federal law also calls for recusal of Federal judges for potential for bias.
We note that although judges are bound by somewhat different rules than arbitrators, judges are clearly not immune from recusal requirements when our neutrality might be reasonably questioned. See, e.g.,
Caperton v. A.T. Massey Coal Co., 556 U.S. 868, 881 (2009) ("The Court asks not whether the judge is actually, subjectively biased, but whether the average judge in his position is 'likely' to be neutral, or whether there is an unconstitutional 'potential for bias.'");
Tumey v. Ohio, 273 U.S. 510, 523 (1927) (holding that the Due Process Clause requires recusal when a judge has a "direct, personal, substantial pecuniary interest" in a case).
The majority pointed out that the Federal judicial standard calls for recusal, while the arbitration standard set forth in this opinion called only for the arbitrator to make disclosure. "[T]he parties can," thus, "make their own informed decisions about whether a particular arbitrator is likely to be neutral." The mandated disclosure, said the Court, was "simplicity itself, and no real burden."
Unlike the standards governing judges, however, our ruling in this case does not require automatic disqualification or recusal-only disclosure prior to conducting an arbitration concerning (1) the arbitrator's ownership interest, if any, in the entity under whose auspices the arbitration is conducted, and (2) whether the entity under whose auspices the arbitration is conducted and one or more of the parties were previously engaged in nontrivial business dealings. Once armed with that information, and the answers to any other inquiries the parties may wish to pose as a result of knowing that information, the parties can make their own informed decisions about whether a particular arbitrator is likely to be neutral. It is simplicity itself, and no real burden, for an arbitrator to disclose his or her ownership interest in an arbitration company for which he or she works, as well as the organization's prior dealings with the parties to the arbitration.
Lastly, the Court observed that its ruling would affect not only arbitrations between "two sophisticated companies," but also "the proliferation of arbitration clauses in everyday life-including in employment-related disputes, consumer transactions, housing issues, and beyond ..." The Court therefore considered it important to recognize that "arbitration will often take place between unequal parties."
At the end, the majority inMonster Energy v. City Beverage (Olympic Eagle)returned to theCommonwealth Coatings standard of "an impression of possible bias."
As theCommonwealth CoatingsCourt stated, "We can perceive no way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias." .... We thus hold that before an arbitrator is officially engaged to perform an arbitration, to ensure that the parties' acceptance of the arbitrator is informed, arbitrators must disclose their ownership interests, if any, in the arbitration organizations with whom they are affiliated in connection with the proposed arbitration, and those organizations' nontrivial business dealings with the parties to the arbitration.
Judge Friedland dissented, arguing that the disclosure of the information at issue would not have made any material difference.
I disagree that, in an evaluation of whether the Arbitrator might favor Monster, the additional information the majority believes should have been disclosed would have made any material difference. I would therefore reject Olympic Eagle's effort to vacate the arbitration award in Monster's favor.
One might be tempted to conclude that the holding inMonster Energy v. City Beverageis idiosyncratic, applying only to the relationship between a for-profit arbitral organization and its owner-arbitrators. However, that might be a too easy conclusion. Advocates may parse the 9thCircuit majority opinion for arguments extending the underlying principles to the relationship between an arbitrator and her law firm, or the relationship between a popular arbitrator and a non-profit arbitral institution that admininsters a significant number of arbitrations for one of the disputing parties. Only time will tell whether such arguments will gain traction in the U.S. Federal courts under the FAA or under State arbitration law where applicable.
This opinion also reminds readers of the existing Circuit split in the US Courts of Appeals regarding the proper standard for determining when arbitrator non-disclosure justifies vacatur for "evident partiality" under the FAA.
Will this decision become the platform for the Supreme Court to finally clarify the confusion created by its 1968 opinions inCommonwealth Coatings? Again, only time will tell.
Until he retired from Milbank, Tweed, Hadley & McCloy LLP, Mark Kantor was a partner in the Corporate and Project Finance Groups of the Firm and resident in the Washington, D.C. office. He serves as an arbitrator and mediator in commercial and investment disputes, and as an Adjunct Professor at the Georgetown University Law Center (Recipient, 2006 Fahy Award for Outstanding Adjunct Professor). Mr. Kantor is a member of the World Bank Group Sanctions Board. He is also Editor-in-Chief of the online journal Transnational Dispute Management.
Third-party arbitration funding continues to be a hot topic in Germany, as evidenced by the fact that it was the focus of the German Arbitration Institute's (DIS's) 2019 Autumn Conference (Third-Party Funding - Short-Term Hype or More?). However, despite the current hype surrounding third-party funding, it has been practised in Germany for more than 20 years.
Generally speaking, such funding was initially used during enforcement. For example, funding was used and funders helped to enforce judgments and arbitral awards against reluctant debtors or in difficult jurisdictions. Later, third-party funding became increasingly popular in investor-state arbitration.
In recent years, third-party funders have been at the forefront of developments shaping the German legal market. For example, they have funded technology-driven providers that, on a contingency basis, enforce passenger claims against airlines or bundle consumer and shareholder claims against car manufacturers.
With much less controversy than in many other jurisdictions - Germany does not follow the common law principles of maintenance and champerty
(1) - third-party funding has thus been used in multiple ways for over 20 years and the German courts have repeatedly validated its use.
A growing number of companies are considering using third-party funding and more international funders than ever are joining established German funders in the German market. This is partly due to Brexit (ie, many financial institutions have set up a presence in continental Europe to ensure their ability to do business in continental Europe irrespective of a negotiated or a 'hard' Brexit), but it also stems from the opportunities that Germany presents.
What is third-party funding?
'Third-party funding' means that an investor undertakes to pay a party's legal costs - in particular, the lawyers' fees and expenses. It may also include an obligation by the funder to:
pay the opposing party's legal costs (if the funded party is so ordered);
pay any other costs, such as the arbitral institution's administration fee, arbitrators' fees and expenses; and
provide security for the opponent's costs (if the funded party is ordered to provide such security).
In contrast to factoring (a form of monetisation of a claim), the funded party will formally retain and enforce its claim.
What terms and conditions are generally associated with third-party funding?
Only a few companies publish their standard financing agreements,
(2) which makes it difficult for parties seeking third-party funding to gain a market overview without legal advice from experienced counsel. In addition, the terms and conditions of third-party funding differ. Nonetheless, third-party funding agreements share some common features.
A funding agreement is entered into between a funder and the funded party, not the funded party's lawyers. The funder undertakes to finance the costs of pursuing the claim in exchange for a predetermined success fee, usually a certain percentage of any proceeds realised or a multiple of the money invested. In practice, it is often a combination thereof, with the funded party agreeing to pay the greater of the two.
Typically, the funded party must:
assign the claims to the funder as security;
disclose all circumstances relevant for the funder's assessment of the claim, including any legal analysis;
release its counsel from confidentiality obligations towards the funder;
report, or have its counsel report, any new developments to the funder;
ensure that the funder has the right to participate in hearings;
enter into any settlements only with the consent of the funder; and
pay the success fee (in case of success).
The funder, in turn, must:
provide the agreed funding (usually lawyers' fees and an advance on the arbitral tribunal's fees); and
reimburse the adverse party's legal costs in case of an unfavourable outcome (some funders always include reimbursement of the other party; for others this is part of the commercial deal to be struck).
Not only an option for potential claimants
Although third-party funding is usually sought by potential claimants, it also is available to defendants. Such funding has remained scarce, as it is difficult to strike a deal that appeals to both the funder and the party seeking funding. If a defendant has a considerable counterclaim such that it may be considered the true claimant, a solution can be found rather easily. Otherwise, the funder's potential gain is usually a portion of the amount 'saved' by the funded party, meaning that a funded defendant that prevails will, following the payment of the success fee to its funder, still have incurred a loss. While such prospects may appear unappealing, there may nonetheless be situations in which a defendant will be interested in avoiding having to pay its lawyers' fees in return for a potential payment to the funder if the defence is successful.
Lawyers cannot offer third-party funding
In Germany, success fees for lawyers are permitted only in exceptional circumstances.
(3) As a result, lawyers generally cannot:
act as funders for their clients;
obtain funding on behalf of their clients; or
become party to the funding agreement.
Lawyers can assist their clients only in identifying suitable funders and agreeing on the terms of the funding agreement. Further, they will often contact the funders to inform them of how the proceedings develop and respond to their questions. However, due to a potential conflict of interest, the funded party's lawyer would never simultaneously act as lawyer of the funder. Instead, in more complex cases, funders often retain lawyers to assist them, initially in assessing the case and subsequently in monitoring the proceedings.
Settlement of funded arbitration
Third-party funding can have a significant impact on proceedings if a settlement is discussed. Difficulties arise if a funded party and its funder cannot agree on whether a settlement offer should be accepted.
In arbitrations with a German connection, the question of a potential settlement may arise more often than in other jurisdictions. German arbitrators frequently offer to assist parties to settle disputes at an early stage in the arbitration (arguably more so than arbitrators from other jurisdictions where such assistance is often considered to raise concerns in relation to impartiality). The 2018 DIS Arbitration Rules stipulate that "[u]nless any party objects thereto, the arbitral tribunal shall, at every stage of the arbitration, seek to encourage an amicable settlement of the dispute or of individual disputed issues".
Funding agreements usually provide that any settlement will require the consent of the funder. This can lead to a situation in which the funded party would prefer to accept a settlement offer but is prevented from doing so by a funder that hopes to gain more from the continuation of the proceedings. Conversely, if the funder prefers to agree to the settlement offer because (for example) a higher amount could only be realised by investing a disproportionately high amount into the continuation of the proceedings, it usually cannot force the funded party to do so.
Some funding agreements solve such situations by referring the dispute to a sole arbitrator, which must decide whether the settlement will be accepted. Problematically, under other funding agreements, if a funded party wishes to pursue the claim while its funder wishes to settle, a termination right for the funder is triggered. Funding agreements may provide that in case of such a termination, the funded party would have to put its funder into the position as if the settlement agreement had been concluded. This obligation would most likely entail a repayment of the funded costs and a success fee. A party that entered into the funding agreement because it had insufficient funds to finance its claim may thereby in practice be forced to accept a settlement agreement because it cannot afford the termination by the funder. Parties entering into third-party funding agreements should watch out for such provisions.
Because most arbitrations are confidential, there is little public information about the use of third-party funding in arbitrations with a German seat or another German connection. However, many recent high-profile litigations have been at least partly funded by international funders, such as Bentham IMF and Burford, which funded (for example) shareholders claims against Volkswagen in relation to its alleged failure to timely inform shareholders about the ongoing investigations into its diesel emissions and antitrust follow-on cases against truck makers.
In one high-profile case, the concept of third-party funding has become particularly controversial. Financialright GmbH bundled the claims of approximately 15,000 car owners against Volkswagen in relation to diesel emissions. The car owners assigned their claims to Financialright to enable it to bring the claims in its own name, joining all of the claims in a single proceeding. However, as regards the car owners, Financialright must pay the proceeds of a successful claim after deducting a certain percentage of the claim as a success fee. If the claim is unsuccessful, Financialright bears the costs.
In this litigation, which is pending before the Braunschweig Regional Court, Volkswagen has argued that Financialright's approach constitutes a combination of claim collection and third-party funding, which violates the German law on legal services. After all, as the car owners do not have to pay the lawyers, Financialright essentially funds the claim in return for a portion of the proceeds; however, it also seeks to collect the claim. Volkswagen holds the view that as a result, the claims must be dismissed because the violation of the German law on legal services renders the respective agreement for the assignment of the claims null and void. Allegedly, Volkswagen and Financialright have each retained four experts on this question, many of whom have published articles on the matter in recent months.
While the third-party funding element may lead to the dismissal of the claim (if the Braunschweig Regional Court agrees with Volkswagen), the discussion should not cloud the view on third-party funding as such. In this case it is not third-party funding per se that is considered inadmissible, but rather the combination of claim collection and third-party funding. Unlike the business model used by Financialright, traditional third-party funding does not involve the element of claim collection; instead, the funded party pursues the claim.
In Germany, traditional third-party funding is an established and safe instrument (with due care regarding the content of the funding arrangement). In general, a party seeking third-party funding will have to consider legal norms applicable to:
the seat of the arbitration; and
the expected place of enforcement.
Absent legal arguments against third-party funding, the question of funding is largely a commercial one. Naturally, a party that has a good claim but no funds to enforce it may choose to obtain third-party funding to stand a chance of having its claim realised. However, third-party funding is not only for the needy. For example, if a party has an interest in keeping its balance sheet unaffected by a costly arbitration (eg, it is preparing a takeover or is in the process of being acquired), third-party funding can be a useful tool.
Third-party funding often sounds appealing, but in reality it is not that easy for a funder and funded party to come together. A party that believes it has a strong claim will be reluctant to promise 20% to 30% or more of the proceeds to a third-party funder. Further, a third-party funder will be reluctant to fund a claim if it believes the claim to be weak and funders will be particularly mindful of the funded party's potential counterparty. Investing in a claim makes sense only if an award can be enforced. If the defendant has assets only in a jurisdiction with a weak track record of enforcing arbitral awards or if a defendant is close to insolvency, third-party funding is unlikely to be available.
(1) See Sessler and Saettler, Handbook on Third-Party Funding in International Arbitration, pp 229 et seq.
(3) See Sessler and Saettler, Handbook on Third-Party Funding in International Arbitration, p 230.
(4) See Hartung (Anwaltsblatt, 2019, p 353). Reportedly, Financialright has passed on that risk to the third-party funder Burford, which advanced the legal costs. However, this is not the aspect of the concept that is the subject of Volkswagen's attack.
(5) See Hartung (Anwaltsblatt, 2019, pp 353 et seq).
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide.
The fourth annual Harbour Lecture took place on 21 October 2019, with hundreds of attendees packed into the Eaton Club, Hong Kong to hear a thought-provoking lecture delivered by Sophie Lamb QC, global co-chair of the international arbitration practice at Latham & Watkins.
The theme of this year's lecture was whether arbitration is sustainable. The premise was the necessary and unavoidable disruption (a 'great transition' of sorts) that will affect not only the arbitration industry, but life and business more broadly. Ms Lamb used the UN's Sustainable Development Goals ("SDGs") as a loose framework to take the audience through a wide array of topics and ideas, from crowd-funded robot arbitrators to climate change, rapid urbanisation, and a growing 'silver economy'.
Each audience member will have been informed and inspired by the lecture in their own way. This recap sets out some of the key issues discussed by Ms Lamb, as well as the authors' impressions and concluding thoughts.
Climate change and business
It is no surprise that environmental, social and governmental ("ESG") issues have made it to the top of the corporate agenda. The World Economic Forum has identified extreme weather and climate change policy failures as among the gravest threats to the global economy.
Undoubtedly, the effects of the climate crisis and strain on resources, including loss of biodiversity, will impact business and relationships. Examples given in the lecture include shifts in the 'users' of international arbitration such as energy companies; necessary updates in the law to deal with arguably increasing foreseeability of 'extreme' events; and the need for financing from private sources, noting already the innovation of 'green bonds' as a collective response.
Moving on to the role of company directors, Ms Lamb shared that there have been calls (including from Lord Sales, Justice of the UK Supreme Court) for company law to require directors to have regard to climate change effects and adopt climate risk management as part of their fiduciary duties. This may involve greater reliance on soft laws and best practice, the importance of which has become generally-accepted over recent decades. On the latter, a balance must be struck between letting companies pursue commercial objectives and also allocating responsibility for the consequences if companies fail to account for ESG factors in their decision making.
On investment law, changes to the ESG context may necessitate shifts in the concepts of 'investors' and 'investments'. The investment arbitration sector faces numerous challenges including the need to counter the public perceptions that 'justice is being privatised', that investment arbitration is to blame for regulatory chill, and a general sentiment of anti-globalisation as well as opposition to trade deals. In addition, the status of intra-EU investment law remains in a state of flux with the consequences of the Achmea decision still transpiring.
Diversity and equality
Diversity and equality are specifically identified as SDGs, and have been in the spotlight in the arbitration sector for some time, especially given the historical lack of both in the industry demographics. Ms Lamb considered it undeniable that gender equality and diversity are vital for the health, sustainability and legitimacy of arbitration, particularly in light of the increasing diversity in users of arbitration.
On gender equality, statistics show that there is still some way to go to achieve equality. Whilst LCIA figures show that women represented 43% of all arbitrators selected by the LCIA Court in 2018, this can be compared with a figure of 23% of appointments overall, suggesting that parties and counsel may lag behind the LCIA in pursuing equality. ICC figures in 2018 are lower, with 27.6% of appointments made by the ICC Court and 18.4% overall being of women.
Ms Lamb identified that another challenge to diversity and equality lies in the difficulty of procuring one's first appointment as arbitrator. In particular, the market tendency to carry out extensive due diligence on prospective arbitrators and the emphasis on past experience means that the pool of candidates will be limited instead of expanded. This is exacerbated by the
IBA Guidelines on Conflicts of Interest in International Arbitration, which Ms Lamb considered do not reflect the realities of modern law firms and require urgent attention to address, for example, ways that firms can manage potential conflicts by implementing information barriers and protocols.
Ms Lamb suggested that these structural barriers could be ameliorated by, for example, allowing junior arbitrators to shadow experienced arbitrators on a disclosed basis in order to gain practical experience and increase prospects of future appointments; a concept that was enthusiastically received by the audience.
Technology and data protection
Technology in the arbitration sector has had a slow start, with most arbitration hearings still relying on voluminous hard copy bundles. Although technology has been used to assist with research, document review, discovery, bundles and translation, it is typically limited to fairly pedestrian tasks.
Ms Lamb pointed out that there is a clear opportunity to adopt much more sophisticated uses of technology, and this has already been done in certain sub-sectors. Businesses such as eBay already use artificial intelligence for dispute resolution, which involves using an algorithm to generate a suggested settlement figure and allows the business to process an extremely high volume of disputes. This type of technology use is particularly suitable for low value and/or routine disputes. Various US government entities also have online dispute resolution platforms for tax and traffic matters.
Ms Lamb gave illustrations of other potential uses of technology such as using Blockchain to authenticate evidence, algorithms to process high volumes of data, and to calculate pricing or quantum in gas and construction disputes. Technology may also assist in mitigating the environmental impacts of modern international arbitration, which involves copious amounts of travel, for example by opting for virtual hearing rooms.
In addition to the broad categories of disruption and progress mentioned above, Ms Lamb commented that there exist other challenges to the future of arbitration such as the emergence of regional international commercial courts (particularly in financial centres), as well as the rise of mediation including the Singapore Convention on Mediation and increasing tendency of parties to opt for a commercially pragmatic rather than legal solution.
As climate change related disputes increase, particularly energy, construction and land use disputes, this will affect various aspects of the arbitration industry. Arbitration is uniquely placed to adapt to these effects, including allowing the choice and application of specified governing laws including climate change instruments, and the choice and appointment of arbitrators and experts with climate change and scientific expertise.
The arbitration industry must persist and do more to achieve gender equality and diversity. This should be viewed as vital to the health and sustainability of the industry. Practical measures such as allowing juniors to shadow arbitrators and updating the IBA Guidelines on Conflicts of Interest in International Arbitration would be moves in the right direction.
Use of technology must be embraced and not feared. That said, opportunities to embrace technological advancement must be accompanied by measures to manage associated and new risks. Data protection and cybersecurity risk management programmes should be implemented such as contractual protection, staff training, and policies for detection and analysis, breach management and containment, and PR and dispute resolution strategy.
Many years ago, a group of friends were driving in the south of England in a rental car and, in need of directions (pre-Google maps and GPS), we pulled over to the side of the road to ask a gentleman the way. I leapt out, approached him and asked for the directions, to which he responded, slowly and in a firm and friendly manner, something to this effect: "Son, around here, when we want to ask a question, first of all we say hello, we have a chat about the day, we have a little exchange, probably introduce ourselves - and then we ask." This has stuck with me for over four decades as a reminder not only of the essential courtesies of conversation, but also of the importance of avoiding inquisitorial ambushes and, primarily, taking the time with the preliminaries to make exchange more likely. And yes, we did get our directions.
The climate activism led by young people made me realise that, while I had taught topics on "the rights of future generations" and "ethical obligations to future generations" over the years, the reality now is that the future generations are right here and not entirely confident that they have a future. For that reason, I have made preliminary contact with some of the school strike leaders to look at ways of starting intergenerational conversations - and may return to this in later blogs.
The challenge of theories of intergenerational rights and obligations probably lies in the way in which notions of "rights" are constructed, so that the attributes of "rights holders" turn on their capacity to claim rights (hence, for some, precluding animals, except to the extent that humans might act as stewards for animals). Having rights might also depend on being able to identify and articulate what the interests are that are to be protected by rights (and concomitant obligations). But again, a present-generation orientation allows us to regard the interests of the future as too contingent and uncertain to be able to act as the ground of rights. If, too, rights are only seen as formally grounded in legal prescription, then those contingent and possibly "natural" rights of future generations risk the kind of dismissal that Jeremy Bentham is famed for, seeing them as "nonsense upon stilts".
Leaving aside the more theoretical questions about rights, the challenge is still there as to how to have these social and political conversations. The opportunity to explore this came up over the last weekend, in two ways. First, on Friday of last week I was asked to join a group of men on
Waiheke Island who had been meeting on a monthly basis for the past seven years, over a simple lunch, in order to talk about a chosen topic or to hear a speaker. In light of the present level of political toxicity (Brexit, Syria, climate change, diversity, immigration, gun control . . . you name it) I was asked to open a conversation about how we might begin to foster civil dialogue. The irony in this, at the outset, seems to be that the two things we (mostly) learn from an early age - talking and politeness - get trampled in the rush to divisive and positional conclusions and, increasingly, lost in the willingness to let convenience and 'winning' outweigh truth.
In wanting to think about how to initiate and reinvent civil dialogue, this group echoed Canadian political philosopher Mark Kingwell:
"The desire for a public conversation that is challenging, lively, decisive, undistorted, and fruitful is widespread. Unfortunately, disagreement about what this conversation should be like, and how it should be defended, is just as widespread. . . In the end . . . the best route to vigorous public debate lies in the conversational virtue of civility."
A Civil Tongue: Justice, Dialogue and the Politics of Pluralism (Penn State Uni Press, 1995][vii & viii]
The second rich conversational experience came through a weekend with old friends, traversing our recent lives, enjoying wine and good food and playing music. On our way home we reflected that what made the conversation so easy was our feeling safe with these friends, even though it had been some time since we last caught up. That sense of safety made it possible to deal with topics that might be edgy, and to know that the integrity of unspoken conversational values would prevail.
Here's where I circle back to my starting point, including the little travel narrative: what are the conditions and actions that contribute to the likelihood of civility in dialogue or to the possibility that conversations and encounters - personal and political and intergenerational - can traverse tricky grounds and be "challenging, lively, decisive, undistorted"? In thinking about this, I will very briefly touch on lessons from recent research in neurophysiology and from traditional practices.
First, recent work by Stephen Porges and colleagues, in a field he calls "contemplative neuroscience", shows that openness to others, the basis of compassion, is not an attitude or an action but rather a "state" made possible by a calm physiological state. The "safety" we might feel in the company of old friends or trusted professionals is the precondition to the receptiveness to others and, I think, the civility that Kingwell and others aspire to.
". . . our brains don't allow us to experience compassion for others until we feel safe. Creating calm spaces in which to explore our differences is an essential step towards rebuilding democratic life."
["Vagal Pathways: Portals to Compassion", in The Oxford Handbook of Compassion Science (2017). Oxford University Press; pp189-202.]
". . . The critical portal to express compassion would be dependent on the capacity to recruit the vagal pathways that actively inhibit sympathetic reactivity and promote a calm physiological state that projects safety and acceptance to others." (190)
How, then, do we "recruit" those pathways? Porges' interesting conclusion from his research is that meditation, music, movement, prayer - rituals of preparation and connection - are typically associated with a calm state, with a sense of safety of self and hence openness. Modern research brings us back to ancient practices.
For those who have explored some of the pre-history of modern mediation, you will recall drawing on traditional practices not merely of a third party intervention, but also of the preparations for dialogue and talking - the talking circles of American First Nations; or the 'ritual' practices that anthropologists such as Victor Turner saw as fostering a "liminal" state, a threshold state between conflict and reconciliation.
The common thread here is that recent neurophysiological research and traditional practices point to the actions that both create the calm spaces and the sense of connectedness that make openness to the other possible.
"A friend is one to whom one may pour out the contents of one's heart, chaff and grain together, knowing that gentle hands will take and sift it, keep what is worth keeping, and with a breath of kindness, blow the rest away."
Youth-Led Peacebuilding: Participatory Action Research
Many of today's youth, at 1.8 billion worldwide, live in areas affected by conflict. The predominant narrative depicts young men as perpetrators of violence and young women as victims. The U.S. Institute of Peace sees youth as agents for positive change and works to equip young peacebuilders with the knowledge and skills they need to bring divided communities together and to manage conflict nonviolently. USIP also helps its youth partners conduct and publish research in their communities, enabling them to develop local solutions to problems and allowing them to be active contributors to the field of peacebuilding.
Youth-Led Peacebuilding: Participatory Action Research
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