Australia: Challenging the regime in international arbitration: an introduction to the Prague Rules

The Prague Rules on the Efficient Conduct of Proceedings in International Arbitration (Prague Rules), which were prepared by a working group comprising arbitration practitioners from Europe and the United Kingdom, will be launched on 14 December 2018.

The Prague Rules challenge the now widely accepted IBA Rules on the Taking of Evidence in International Arbitration (IBA Rules). In the preface to an early draft of the Prague Rules, the working group explained:

'... from a civil law perspective, the IBA Rules are still closer to common law traditions, as they follow a more adversarial approach regarding document production, fact witnesses and Party-appointed experts. In addition, the parties' entitlement to cross-examine witnesses is almost being taken for granted. These factors contribute greatly to the costs of arbitration...'

The group concluded that 'by adopting a more inquisitorial approach of the arbitral tribunal, the new rules will help the Parties and the Arbitral tribunals reduce the duration and costs of arbitration'.

This article provides a brief overview of the essential elements of the final draft of the Prague Rules with observations on the differences between those rules and the IBA Rules.  The article also considers how the introduction of the Prague Rules might impact on international arbitration practice and procedure.

The role of the tribunal

The Prague Rules are predicated on an early case management conference convened 'without any unjustified delay' (Article 2.1).

Amongst other things, and perhaps controversially, the arbitral tribunal may at this conference indicate to the parties:

'its preliminary views on:

  1. the allocation of the burden of proof between the parties;
  2. the relief sought;
  3. the disputed issues; and
  4. the weight and relevance of evidence submitted by the parties.'

(Article 2.3(e)).

The Prague Rules provide specifically that '[e]xpressing such preliminary views shall not by itself be considered as evidence of the arbitral tribunal's lack of independence or impartiality, and cannot constitute grounds for disqualification'. Given the supervisory jurisdiction of the courts in most jurisdictions, there is a question around the value and effect of this statement and the reliance a party should place on it. A court subsequently asked to remove an arbitrator for lack of independence or perceived bias may proceed to hear and determine the application irrespective of the statement. Conversely, an arbitral institution may rely on it when asked to determine a challenge in arbitral proceedings conducted under that institution's rules.

The IBA Rules are underpinned by an obligation on the parties to act 'in good faith and be entitled to know, reasonably in advance of any Evidentiary Hearing or any fact or merits determination, the evidence on which the other Parties rely' (Preamble). The first step in this process is mandatory consultation by the arbitrator 'at the earliest appropriate time in the proceedings with the parties to invite them to consult each other with a view to agreeing on an efficient, economical and fair process for the taking of evidence' (Article 2).

The IBA Rules provide an opportunity, in less prescriptive language than that used in the Prague Rules, for the identification by the tribunal of any issues:

  1. 'that the Arbitral tribunal may regard as relevant to the case and material to its outcome; and/or
  2. for which a preliminary determination may be appropriate.'

(Article 2(3)).

Fact finding

An arbitral tribunal conducting proceedings under the Prague Rules is 'entitled and encouraged to take a proactive role in establishing the facts of the case which it considers relevant for the resolution of the dispute' (Article 3.1), but this does not 'release the parties from their burden of proof'. The tribunal is authorised to take steps at its own motion and at any time after having heard the parties to:

  1. ask a party to produce relevant documents or make available the testimony of a fact witness;
  2. appoint one or more experts (including on legal issues);
  3. order inspections; and/or
  4. 'for the purposes of fact finding, take any other actions which it deems appropriate.'

(Article 3.2).

Under Article 3.3 of the Prague Rules, an arbitral tribunal may impose a 'cut-off date for submission of evidence' so that evidence after that date is not accepted 'except in exceptional circumstances'.

Disclosure of documents

The IBA Rules deliberately and clearly adopt a disclosure regime which contains elements of discovery or disclosure under each of civil and common law frameworks. Article 3 sets out in detail the process for document requests, including requests from non-parties or organisations.

The Prague Rules seek to restrict disclosure on a number of fronts.

First, parties are required to produce 'documentary evidence upon which [they intend] to rely in support of [their] case as early as possible in the proceedings' and the arbitral tribunal and the parties are encouraged to 'avoid any form of document production, including e-discovery' (Articles 4.1 and 4.2). There is, however, opportunity under the Prague Rules for a party to request a document or documents and for the arbitral tribunal to order disclosure (Articles 4.3 to 4.5).

Both the IBA Rules and the Prague Rules address the question of the media or format in which the documents are to be produced. Article 3(12) of the IBA Rules provides that copies of documents 'shall conform to the originals'. It provides further that where a document is an electronic document, it 'shall be submitted or produced in the form most convenient or economical to it that is reasonably useable by the recipients'. Article 4.6 of the Prague Rules provides for documents to be produced 'in photocopies and/or electronically'. There is provision under both rules for the production of originals when requested.

Confidentiality

There is no general obligation of confidentiality in the Prague Rules. However, Article 4.7 provides that documents produced by a party in the arbitration proceedings and not otherwise in 'any public domain' must be kept confidential and 'may only be used in connection with that arbitration save where and to the extent that disclosure may be required of a party by the applicable law'.

The IBA Rules have a consistent theme of confidentiality, including in relation to documents, settlement discussions, evidence and experts (see in particular Articles 3 and 9).

Witnesses

The Prague Rules require the identification of fact witnesses and an outline of their evidence to be provided at the same time as a party files a statement of claim (Article 5.1). Parties are also required, at this time, to identify 'the relevance and materiality of the testimony [of each witness] for the outcome of the case (Article 5.1(c)). This requirement will pose challenges for many disputes; it essentially requires a party commencing arbitration under the Prague Rules to 'front load' the dispute before the request for arbitration is filed.

Under the IBA Rules, the parties identify the witnesses '[w]ithin the time ordered by the arbitral tribunal' (Article 4(1)).

More significantly, under the Prague Rules, it is the arbitral tribunal which decides which witnesses will be called (if any) (Article 5.2). The parties have a right to be heard on this issue before the tribunal makes its decision. The arbitral tribunal may make its decision as to witnesses 'either before or after a witness statement has been tendered, in particular if it considers the testimony of such a witness to be irrelevant, immaterial, unreasonably burdensome, duplicative or for any other reasons not necessary for the resolution of the dispute' (Article 5.3). However, if the arbitral tribunal decides not to call a witness before a statement for that person is tendered in the proceeding, a party may still tender the witness statement (Article 5.4).

If the arbitral tribunal conducting proceedings under the Prague Rules considers it appropriate, the tribunal may itself 'invite a party to submit a written witness statement of a particular witness before the hearing' (Article 5.5). Where this occurs, it is open to the tribunal to decide not to hear cross examination of that witness (Article 5.6). However:

'if a party insists on calling a witness whose witness statement has been submitted by the other party, the arbitral tribunal should generally call the witness to testify at the hearing, unless there are good reasons not to do so.' (Article 5.7).

The arbitral tribunal is not limited in the evidential value it accords to a witness statement by whether or not that witness is called for cross examination (Article 5.8).

Cross examination at a hearing under the Prague Rules is to be 'conducted under the direction and control of the arbitral tribunal' (Articles 5.9).

The arbitral tribunal has significant control (Article 5.9). This includes setting the order of the examination of witnesses, setting time limits and limiting the type of questions which can be asked (the latter of which is also provided for in the IBA Rules). It may also hold 'witness conferences'. This level of control is likely to appeal more to those familiar with civil law procedure. Counsel with a common law background may be reluctant, it many circumstances legitimately so, to defer to the arbitral tribunal on decisions relevant to the strategy of the case. The order of witnesses (in particular) is a key strategic step.

The IBA Rules give both the parties and the arbitral tribunal the right to identify which witnesses are required for cross examination (Article 8(10). Furthermore, Article 4(7) provides clearly that:

'If a witness whose appearance has been requested [...] fails without a valid reason to appear for testimony at an Evidentiary Hearing, the arbitral tribunal shall disregard any Witness Statement related to that Evidentiary Hearing by that witness unless, in exceptional circumstances, the arbitral tribunal decides otherwise.'

Witnesses in proceedings where the IBA Rules apply must appear in person 'unless the arbitral tribunal allows the use of videoconference or similar technology' (Article 8(1)), whereas the Prague Rules encourage the use of such media (see discussion in relation to Article 8(2)).

The IBA Rules give the arbitral tribunal the power to exclude from evidence documents, statements and oral evidence for a number of specified reasons (Article 9). These include lack of sufficient relevance, privilege, commercial or technical confidentiality and 'procedural economy'.

Experts

Article 6 of the Prague Rules sets out the procedure for the appointment of experts. The arbitral tribunal may (either at the request of a party or of its own motion) appoint one or more experts (after hearing from the parties) and may seek suggestions from the parties as to the identity of those persons) (Article 6.1 and 6.2(a)).

Parties may also submit expert reports from experts they have retained (Article 6.5). Where the tribunal decides to appoint an expert, Article 6.2 sets out the mandatory procedure for the appointment and engagement of that expert. The tribunal's role includes '[m]onitor[ing] the expert's work and keep[ing] the parties informed regarding its progress' (Article 6.2(e)).

There are provisions under the Prague Rules for joint lists of questions for expert reports (Article 6.6) and expert conferences (Article 6.7), all of which are designed to streamline the arbitration proceeding.

The IBA Rules provide for what has, to date, been considered a more conventional procedure for expert testimony. They are also very prescriptive as to the content of expert reports and the procedure for receiving and evaluating expert evidence (applicable to both party appointed experts and tribunal appointed experts (Articles 5 and 6).

Iura Novit Curia

One of the unique features of the Prague Rules is found in Article 7 which provides that each party bears the burden of proof with respect to the legal position on which it relies. However:

'the arbitral tribunal may apply legal provisions not pleaded by the parties if it finds it necessary, including, but not limited to, public policy rules. In such cases, the arbitral tribunal shall seek the parties' views on the legal provisions it intends to apply. The arbitral tribunal may also rely on legal authorities even if not submitted by the parties if the relate to legal provisions pleaded by the parties and provided that the parties have been given an opportunity to express their views in relation to such legal authorities.'

Hearing

The Prague Rules advocate a determination 'on the papers' to the extent that this is appropriate for each particular case (Article 8.1). If a hearing is required (or requested by one of the parties), 'the arbitral tribunal shall seek to organise the hearing in the most cost-efficient manner possible, including by limiting the duration of the hearing and using video, electronic or telephone communication to avoid unnecessary travel costs for arbitrators, parties and other participants' (Article 8.2).

Some jurisdictions prohibit the giving of evidence via video in legal proceedings. Any such restriction needs to be considered by a party before consenting to the use of the Prague Rules.

Settlement

There has been recent discussion within the international arbitration community about the role (or even obligation) of an arbitral tribunal to encourage the parties to explore a commercial resolution of their disputes.

The Prague Rules recognise the importance of settlement and the role the arbitral tribunal can play – Article 9.1 provides that unless a party objects, 'the arbitral tribunal may assist the Parties in reaching an amicable settlement of the dispute at any state of the arbitration'. The wording of this Article is broad – it does not impose an obligation on the arbitral tribunal itself to facilitate settlement discussions (but equally does not preclude it from doing so). An arbitral tribunal would be perfectly entitled pursuant to this Article, to raise with the parties the prospect of a parallel mediation or an adjournment for the purposes of a facilitated negotiation. What is significant is that the arbitral tribunal is empowered to take steps to encourage the parties to explore a resolution other than by the handing down of an arbitral award. There is no equivalent provision in the IBA Rules.

Article 9.2 arms the arbitral tribunal with an additional weapon. If the parties consent, 'the arbitral tribunal may also act as a mediator to assist in the amicable settlement of the case'. If the tribunal takes up this second role and the dispute is not settled, the tribunal member who has acted as mediator can either continue as arbitrator with the written consent of the parties or, if the parties do not consent, terminate his or her mandate.

From a practical perspective, there are potential problems with the powers given to the arbitral tribunal under this Article.

First, one can foreshadow circumstances where the parties might ask members of the tribunal (or one of them) to act as a mediator, only to have a lack of consensus within the arbitral tribunal as to the wisdom of this course. Secondly, if one tribunal member acts as mediator, the dispute does not settle and the parties do not consent to that member resuming his or her position on the tribunal, a replacement arbitrator will be required. This may delay the arbitration proceeding and incur additional costs for the parties while the new arbitrator familiarises himself or herself with the dispute. The engagement of a mediator independent of the arbitral tribunal will avoid this.

Conduct of the parties

There are two specific provisions in the Prague Rules dealing with the conduct by the parties in the arbitration proceedings. Article 10 authorises the tribunal to draw an adverse inference where, without 'justifiable grounds', a party breaches an order or instruction of the tribunal. Article 11 allows the tribunal to take into account the parties' conduct, 'including their co-operation and assistance', when deciding on the allocation of costs.

The IBA Rules also empower the Arbitral tribunal to take conduct into account when assigning costs of the arbitration where 'the Arbitral tribunal determines that a Party has failed to conduct itself in good faith in the taking of evidence' (Article 9(7).

Deliberations and award

There is no time limit in the Prague Rules by which the arbitral tribunal must deliver its award, however there is an obligation on the tribunal to 'use its best efforts to issue an award as soon as possible' (Article 12.1). The arbitral tribunal is mandated under Article 12.2 to consult on the case before the hearing and to hold its first deliberations as soon as possible after the hearing. If there is no evidentiary hearing and the dispute is decided 'on the papers', the deliberations must be held as soon as possible after all documents have been submitted to the tribunal.

Looking ahead

Each of the IBA Rules and the Prague Rules offer tools which (with the consent of the parties to an arbitration proceeding) can be used by the Arbitral tribunal to ensure efficiency and economy in the arbitral process. Both sets of rules focus on disclosure and witness testimony in order to reduce both time and costs.

The Prague Rules provide for earlier intervention by the Arbitral tribunal in the early case management conference. The advantage of this is that the Arbitral tribunal will be required to turn its mind to the issues and the potential evidence at the same time as it is considering procedural order number 1 (and the procedural timetable). One welcome outcome from this process might be an avoidance of procedural orders based on precedent (often long form and covering all eventualities) and the emergence more frequently of 'bespoke' procedural order which reflects the intent of the parties in choosing arbitration and records a reasonable, cost effective and practical timetable which accommodates the nuances of the dispute. However, this will only work if the parties themselves have taken the time to fully articulate their claims and counterclaims before the case management conference.

The IBA Rules, on the other hand, also encourage early 'intervention' by the arbitral tribunal but provide greater discretion and flexibility by mandating consultation 'at the earliest appropriate time'.

The reality is that until a dispute arises it can be difficult to know what procedures and steps are best suited to resolving that dispute.  Binding parties to an arbitration under the Prague Rules might not always offer the right solution.  However, there is no doubt that parties engaged in the arbitration process should have regard to the Prague Rules (in the same way as they might the IBA Rules) in advance of the first case management conference, asking themselves whether, in the circumstances of the dispute, all or part of the rules can assist in managing time and cost in the proceeding.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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