Explaining the two models of arbitration with a simple example.

Having spent over 25 years in commercial shipping prior to joining Singapore Chamber of Maritime Arbitration over a year ago, I am surprised at the lack of awareness and understanding among the commercial shipping professionals about arbitration in general and the various arbitration models and their key features. I must admit that I too was in the same boat before starting at SCMA. Thus, this article and an attempt to explain these arbitration models and their workings with a simple example.

Imagine you are living in a city, like Singapore. It is quite common to have two or even more retailers in the city selling the same product. Two examples for electronic goods retailers in Singapore are Best Denki and Gain City. Similar examples exist in other cities as well. Now, in the same way, there are several “retailers” or bodies providing Arbitration services in Singapore and other centers around the world.

Singapore’s largest provider of arbitration services is Singapore International Arbitration Centre (SIAC), set up in 1991, which is not only successful in Singapore but also world over. Another provider in Singapore is the smaller and younger Singapore Chamber of Maritime Arbitration (SCMA), which came into existence in its present form in 2009, and is more focused on a specific area, namely maritime and trade. But that is not the only difference between the two bodies. Their arbitration models are completely different.

To explain the differences between the two models – the self-administered model of SCMA and to some extent, LMAA (London Maritime Arbitrators Association) and the institutional or administered model of SIAC, ICC (International Chamber of Commerce) & LCIA (London Court of International Arbitration) - let us take our retailer example forward.

Assume that one of the retailers offers a “personal shopper” service, which is suitable for the buyers who want their shopping needs to be catered by the store’s personal shoppers, who will do all the work based on the preferences of the buyers. Of course, the service comes at a cost with a fixed fee that you pay when you sign up for the service and another a variable one that you pay depending on the amount of shopping and time involved. This is what SIAC, ICC and other administered, institutional models offer in form of administrative services – they are involved throughout the arbitration process and have dedicated resources for the process. They charge a fixed case filing fee and a variable administrative fee depending on the amount in dispute. The “expert’s fee” (read Arbitrator) is also determined by them and is also charged as a percentage of the amount in dispute. Thus, the arbitration costs for a million-dollar dispute are much higher than a dispute covering few hundred thousand. Under this model, the larger the amount of claim, the higher the arbitration costs.

Continuing with our retailer example, the other retailer allows the buyer to shop on his own. All it offers is a place to access the products and a safe and reliable framework for shopping. This is what SCMA & LMAA offer – a framework for dispute resolution. They do not administer the arbitration process and therefore are extremely low cost. Since the parties are doing their own “shopping”, they are in control of the process and manage the process themselves. For example, SCMA does not charge any case filing fees or levy any administrative charges. Even the “experts” (Arbitrators) chosen by the buyer are either from SCMA’s panel of arbitrators or a non-panel arbitrator of their own choosing, and at a cost (usually an hourly rate), mutually agreed between the parties and arbitrators. There is no linkage with the amount in dispute. It is possible, under this model, that the arbitration costs for a million-dollar dispute are similar to few hundred-thousand-dollar dispute, subject of course to the time that the arbitrator spends on the case. At the request of the parties, SCMA does offer additional services such as fund holding and chairman’s appointment of arbitrator(s). For these, it charges a nominal fee.

It is important to note that though the product offered is the same – Arbitration – the two models are totally different and do not compete at all. There is no “one fits all” solution and certain parties and contracts prefer the “personal shopper” while others feel they can manage the “shopping” on their own. It is all down to the buyer to make an informed and knowledgeable choice.

An important aspect to remember is that the decision of choosing the most suitable arbitration model must be made by the parties well before the dispute arises – at the stage when the contract is being negotiated and agreed. Make a wise choice and a clear one! 

I know this is a very simplistic way of looking and comparing the two models of arbitration but sometimes you just need a simple explanation to understand a complex matter.