The Silo Effect in Arbitration

It has been persuasively argued that tribalism and tunnel vision inside banks contributed to the international financial crisis of 2008.   Arbitration has its own silos and they bring their own risks, says James Clanchy.

An anthropologist’s perspective

In her widely acclaimed new book, “The Silo Effect”, Gillian Tett, US managing editor and columnist at the Financial Times, has brought her training as an anthropologist to bear on the fragmentation inside organisations and professions.

Tett’s book is subtitled “Why Putting Everything in its Place Isn’t Such a Bright Idea”.  She suggests that perfectly intelligent people, such as managers of multinationals and of banks, economists and civil servants, create and inhabit silos, which then trap them and lead them to fight with each other and to overlook dangerous and costly risks.  As she warns, “silos can create tunnel vision, or mental blindness, which causes people to do stupid things.”

The first chapter of Tett’s book opens with a quotation from the renowned French sociologist, Pierre Bourdieu: “Every established order tends to make its own entirely arbitrary system seem entirely natural”.

It was Bourdieu who contributed the (rather less pithy) foreword to the influential book on the sociology of international arbitration, “Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order” by Yves Dezalay and Bryant C Garth.

That book in turn inspired Emmanuel Gaillard’s 2014 Freshfields lecture, “Sociology of international arbitration”, in which he said, “There is no doubt that the international arbitration world possesses all the key features of a ‘recognized area of institutional life’ with a constellation of actors performing various roles and functions such as key suppliers, consumers, regulatory agents, and organizations, all of which share a ‘common meaning system’ and interact more frequently with one another than with other social agents.”

Another planet and other silos

A discussion of the musings of French sociologists?  This is precisely the kind of nonsense you find on these arbitration blogs, a commercial arbitration practitioner who has read as far as this might think.  I must be from another planet.

A sense of detachment, or of a splitting into silos, emerged in the controversy that greeted the important and influential White & Case/Queen Mary University of London (QMUL) 2015 International Arbitration Survey on Improvements and Innovations in International Arbitration.

Ian Gaunt of the London Maritime Arbitrators Association (LMAA) complained that the survey had failed to take proper account of the numerous ad hoc maritime and commodities arbitrations seated in London.  “The survey purports to be a general survey of international commercial arbitration yet, by ignoring ad hoc arbitration it is nothing of the kind,” he said.  He is reported to have protested that it might appear that “self-regarding” international commercial arbitration practitioners were unwilling to acknowledge the role ad hoc arbitration had played in London’s success.

A case of two silos or perhaps even three?  The majority (79%) of international commercial arbitrations in which the respondents to the survey were involved were institutional rather than ad hoc.  In contrast, an estimated 1,813 new arbitrations were referred to LMAA members in 2015 while the LCIA saw (a record) 326 arbitrations referred to it in the same year.

On the other hand, whilst arbitrations conducted under the LMAA Terms are ad hoc, commodities arbitrations in London are usually administered arbitrations with the process managed by trade associations.  The applicable arbitration rules are quite different from the LMAA Terms.  They often provide, for example, for “second tier” arbitration and for arbitrators to be appointed by the association, not the parties.  The procedure is more distant from English court procedure than is, say, the default procedure under the LCIA Arbitration Rules (institutional rules which are, incidentally, also used for commodities and shipping disputes from time to time).

Ships that pass in the night

A particular feature of maritime arbitrations is that it is extremely common for at least one party to have its costs funded by an insurer.

As noted in my last blog post, shipowners’ Protection and Indemnity (P&I) Clubs and Freight Demurrage and Defence (FD&D) Clubs have provided funding for the pursuit and defence of contractual claims in international arbitrations since the nineteenth century.  In doing so, they have made an enormous contribution to the development of arbitration and commercial law in England and elsewhere.

By ignoring traditional insurers and concentrating instead on a more limited exposure to third party funding (TPF) in their own silos, those who seek to regulate claimants who have recourse to new commercial TPF are in danger of treating them unfairly.  At the same time, they are neglecting to scrutinise potentially risk-laden practices of traditional insurers (for example, non-disclosure of their participation).

Likewise, the practices of claim managers deserve attention, as the court found in the recent case of Cofely v Bingham (see our separate blog post here).  The arbitrator in that case was clearly of the view that his conduct was “entirely natural”.  His reaction to an enquiry about previous appointments indicated that his particular silo had sheltered him from parties’ reasonable expectations.

Build bridges, not silos

It may seem paradoxical to suggest that the vast and varied international arbitration community could be a “silo” of its own.  However, as Gaillard noted in his Freshfields lecture, whilst the numbers attending its “periodic mass gatherings” around the world grow ever larger, these rituals remain “largely inflexible” and exclude “non-believers”.

Arbitration serves its users and should welcome new participants. This year’s QMUL survey, sponsored by Pinsent Masons, is going to look at dispute resolution in the TMT sectors - you can read further about the survey in our earlier blog post. As Prof Loukas Mistelis has said, “A bespoke survey will assist the wider arbitration community identify the expectations and needs of this significant sector”.  The survey should help to avoid the creation of a new silo and, instead, should help to build bridges between the international arbitration community and its users.

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