Pre-arbitral referee rules: an undervalued tool

Out-Law Analysis | 09 Mar 2016 | 9:50 am | 3 min. read

FOCUS: Companies should consider taking advantage of a little-used dispute resolution tool that can save time and money: pre-arbitral referee rules. 

Dispute resolution through arbitration is quicker and more cost efficient than a court proceeding but it is a still a long and expensive process that any organisation would prefer to avoid if possible. But pre-arbitral referee rules are often overlooked and can prevent cases from even reaching arbitration, and give early insight into those that do.

The rules were introduced in 1990 by the International Chamber of Commerce (ICC). The rules set out the details of what is essentially a mini arbitration proceeding, but with a non-binding result, and were designed to provide parties with a proceeding similar to a preliminary injunction while avoiding national courts.

The use of these rules has never really taken off. It took almost three years for the first case to be filed, and case numbers have remained low: between 1990 and 2008, only nine requests were filed. Partly, it may be the opt-in nature of the rules, and the fact that pre-arbitral orders are not binding, that puts parties off using them.

The introduction of the ICC's Emergency Arbitration Rules in 2012 has further helped to eclipse the pre-arbitral rules. The emergency arbitration rules form part of the ICC's general rules of arbitration and emergency arbitration orders come closer to a preliminary injunction by national courts.

The case for using the pre-arbitral rules, however, is strong. The proceeding is quick, costs little, and gives useful information on the strength of a case before it reaches a court.

For example, a respondent has only eight days to respond to a pre-arbitration request, and a referee will also be appointed in that time. The referee then has 30 days to come to a conclusion and make an order. The result is that the process is usually completed within 38 days.

The filing party in a pre-arbitral proceeding pays $5,000 to cover administration costs of $2,500 plus an advance of $2,500 for fees and expenses. There will be additional costs for legal assistance and if the parties nominate experts, but the expenses generally remain low.

In comparison, a three-arbitrator panel of a $10 million dispute under ICC international arbitration rules would cost up to $562,200 in arbitrator fees, and $57,515 for administrative expenses, not even mentioning costs for legal counsel. The average duration of an arbitration proceeding in front of the London Court of International Arbitration is currently 18 months. Costs for emergency arbitration are also high,  with a minimum of $ 40,000 in fees plus legal counsel.

Arbitration is still cheaper and faster than national court proceedings in most countries. However, there is surely good cause to look at an additional first step that may prevent the need for a full arbitration proceeding.

Pre-arbitral proceedings offer an excellent tool for early case assessment. The opposing party will be obliged to reveal its defence strategy and present any information that it has to counter the initial claim. This can be a great advantage: either it becomes obvious that a claim is not as strong as it was thought to be, and the initiator can decide not to begin a real arbitration proceeding, or that the defence is weak and either the case is settled or the claimant proceeds to arbitration with a better view of the case.

After investigation, the pre-arbitral referee can order conservatory or restorative measures, order parties to make payments or take contractual steps, and order further evidence to be found. These orders are non-binding, but they do give both parties an insight into what is likely to happen if they take the dispute further. This may encourage them to settle the dispute at an early point.

Even if the parties do not settle, the costs are negligible compared to the regular proceeding to follow, and the parties gather valuable information and a realistic view of their chances.

There are two main downsides to using a pre-arbitral proceeding: it raises the other party's awareness of the dispute; and there is no way to enforce participation: a party can simply ignore any resulting order. This can only be assessed for each case individually.

As regards awareness, disputes rarely arise out of the blue, and it is likely that the other party will already be aware of the conflict. As regards the voluntary nature of the proceeding, this is a feature that pre-arbitral proceedings share with most alternative dispute resolution proceedings: However, if the other side does not engage in the pre-arbitral referee procedure and thus escalates the matter to arbitration without a meaningful exchange of positions, such tactics may lead to an award requesting it to pay an extra share of the costs.

Because this is an opt-in provision, it is useful to build it into an agreement in advance, as it is unlikely that both parties will agree to the pre-arbitral hearing once a dispute has begun. The ICC has proposed wording that can be included in an arbitration clause.

Lawyers should call attention to the pre-arbitration possibility when advising clients on dispute resolution clauses, and make them familiar with the pros and cons of this unique proceeding. I believe there is a real possibility that this dispute resolution tool could become popular once people understand its useful features.

Munich-based Moritz Maassen is a dispute resolution expert with Pinsent Masons, the law firm behind