Pay now, argue later: solutions to the cash flow problems in international arbitration

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Summary: We would all rather have money now than later. Arbitration takes time, and if an award is not paid, enforcement can take even more time. A litigation claimant can use summary judgment and go straight to enforcement; a party to adjudication can rely on the fast-track nature of that procedure. So what can a party to an arbitration do in the short term to unlock cash tied up in a long-running dispute?

Introduction

This article explores the problem of cash being locked up in an international arbitration process, and explains some potential solutions. Some can be used in virtually any arbitration, others depend on particular institutional rules, and still others need bespoke clause drafting. All highlight the importance of taking the initiative in designing and conducting arbitration proceedings.

The cash flow problem in international arbitration

An arbitration claim is an asset, but not a very liquid one. Even if the facts appear simple, and the merits look good, in a high-value case one can expect to wait between 18 months and 3 years before an award is issued, and months or years more before it is paid or enforcement proceedings are fruitful.  Interest might compensate for time spent out of the money, but that may be scant consolation by the time the annual results are published or a vital investment opportunity has already been missed for lack of funds.

This problem of cash being locked up in a claim is addressed by various mechanisms in other forms of dispute resolution. The courts have the strongest weapons: the possibility of summary judgment, and the sanctions associated with non-payment of a court order. Adjudication was specifically designed to prevent cash getting locked up in construction disputes, and the statutory scheme provides for the whole process from notice to reasoned decision to last at most 42 days.

Possible routes to unlocking cash during the life of an arbitration

So what of arbitration?  Happily, there are methods of unlocking cash that can be tried in virtually any case.  The first is to apply for emergency measures from either the Tribunal or the court at the seat.  For example, in a dispute over contractual terms and refusal to supply, you may persuade a tribunal to order your supplier to continue to supply while the dispute plays out.  If you can keep your business running, you can keep earning cash, even while you continue to argue with the supplier about how much is owed overall.

Another technique is to ask the Tribunal to bifurcate proceedings, hear certain issues as preliminary issues, and/or to hear certain claims as a sample. The goal here is to obtain a partial final award.  While it will not determine all issues, such an award should be immediately enforceable and thus release some cash, and might persuade the other party to settle the whole dispute.

Broadening options in future disputes: institutional rules

To go beyond these basic solutions, and create a wider menu of options, choose your institutional rules carefully.  Many arbitral institutions have reformed their rules in recent years with a view to making proceedings quicker and more flexible.   Here are some highlights:

  • The ICC and Stockholm Chamber rules now contain special rules providing for the appointment of an “emergency arbitrator” to rule on requests for urgent provisional measures even before the appointment of a tribunal.
  • Several institutions, notably the Stockholm Chamber, the AAA/ICDR and the SIAC, now have separate sets of rules, or specific provisions within their rules, specifically designed for expedited arbitrations.

Bespoke clause drafting

If that is not enough, consider working the following into your arbitration clause:

  • A “continued performance” clause to the effect that parties shall continue to perform their payment obligations irrespective of the existence of a dispute, and/or a prohibition on suspension of performance during a dispute.
  • Express provision in the arbitration clause that proceedings should take no longer than 3 or 6 months.
  • A provision that an award debtor shall pay within 14 days, failing which the award creditor can levy liquidated damages or apply a high level of interest (but, if using English law, watch out for the rules on penalty clauses).

BLP Perspective

The beauty of arbitration is that it is the creature of the parties.  Within the bounds set by the  mandatory laws of the seat, and any institutional rules, the parties are free to define and conduct proceedings as they see fit.  This freedom can be used to unlock some or all of the cash that is disputed in an arbitration.  A General Counsel that succeeds in doing so may win friends within her organisation both for the arbitral process and for herself.

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