Confronting cognitive biases in international arbitration

In her speech in March 2022, Claudia Salomon, the President of International Chamber of Commerce (ICC), mentioned Maslow’s Hammer, the cognitive bias on over reliance on a familiar instrument, in our case arbitration and its “magnetic” pull. And she questioned, among other things, “whether staying out of courts is the best outcome for our clients – or whether we let our bias for arbitration over other tools creep in”.

Starting from this question, some cognitive biases of in–house counsel and parties’ representatives when selecting the method of disputes resolution under a contract and subsequently managing and participating to the arbitral process, are herein presented.

Indeed, the purpose of the present paper, without any scientific pretended value with particular reference to the short description of the various cognitive biases, is to propose a framework allowing us to recognize and manage our unconscious biases in performing any legal profession, focusing on in – house counsel daily activity.

Should I stay or go?

When choosing how to solve disputes under a contract, two major elements should be taken into account by the in–house counsel in order to possibly avoid the typical (and somehow dangerous) “illusion of control” in any legal profession, which includes not only the cognitive bias on “over reliance”, well represented by Maslow’s Hammer, but also the “overconfidence bias” (i.e. being the most expert person on any specific subject), as well as the “outcome bias”, to be intended as the expectation of a positive result simply based on the fact that, for example, past arbitration proceedings were always concluded with favourable awards.

1.    The type of contract

As regards the type of contract, one may consider the variety of agreements used in the energy sector, starting from the construction contracts of power plants and infrastructures up to the new kind of contracts of the energy transition like demand – response or contracts related to electric mobility, together with all contracts for the supply of electricity to customers.

Does arbitration fit for all these types of agreements?

No. While arbitration remains without doubt the best mechanism to solve disputes arising from an Engineering Procurement Construction contract, serial cases related to payments of electricity bills may be better solved by ODR – Online Disputes Resolution tool, using platforms where the claim is submitted and elaborated by an artificial intelligence system which in few seconds and at irrisory costs makes a proposal of settlement to be signed online in case of acceptance by the counterparty.

2.    The presence of the party in the country where the contract is to be performed

When the party is one of the major players with a long - time presence in a determined country, ordinary courts may be the preferred jurisdiction with respect to arbitration, which remains the best solution in any country where the party is a new comer as investor, contractor or supplier. It is worth noting that in some cases foreign investors face a less than impartial (not to say unfair) treatment by the local judges, although said investors are de facto local citizens to be treated according to the fair and equitable treatment standards.

Is it worth starting an arbitration?

This is the fundamental question that any party should raise when assessing pros and cons of starting a litigation, either in court or in arbitration, bearing in mind the consequent costs, time and energy that distract all functions involved in the dispute from the ordinary course of business.

Why not approach the counterparty to try to achieve an amicable settlement without resorting to formal channels? Potentially in this moment a “first move paralysis” may intervene: “if I do the first move to try to negotiate, my position will be considered weak or even groundless”.

Alternatively, a request for arbitration is filed and the final award, in most cases, is rendered on a “split the baby” reasoning by the arbitral tribunal. That is, with the same outcome of a settlement agreement which could have been finalised two or three years earlier saving time and substantial costs such as outside counsel’s fee and arbitral costs and fees.

When the dispute arises

The worst situation an in–house counsel may face when the dispute arises is its top management giving instructions to immediately start an arbitration “for a matter of principle”. When irrational and emotional reasons are the basis of the decision to submit a request of arbitration, the case should be considered lost from the very beginning, it being however ordinary courts a better mechanism of disputes resolution than arbitration and judges more objective in taking their decision without any involvement whatsoever in the matter under dispute.

A similar “emotional” situation may be also faced when the party and its counsels assume a very aggressive approach having in mind a “win win win” philosophy, which in most cases makes them loose the focus on the real issue under dispute. As a consequence, even the preparation of the documents and the hearing may be somehow vitiated when concentrating on winning the arbitration by all means.

The procedural phase

What happens once the arbitral proceedings begins?

In the procedural phase, it is frequent to assists to phenomena of prima donna syndrome when preparing the witnesses and, in general, the hearings: the more in–house counsel recommends top managers of the company to give short and clear replies, the longer and full of details said replies will be, increasing the possibility to enter into contradictions during the cross-examination process. It is worth mentioning the “story bias”: people sometimes feel more comfortable in understanding a story – telling, which apparently describes in full details the facts occurred during the performance of the contract, but actually distorts the reality.

Another frequent bias of the parties’ representatives is the idea that preparation and management of arbitration is a pure legal matter and, as such, has to be dealt exclusively by the legal department. This is obviously wrong considering that all project team members have to be involved with respect to e.g. technical, financial, fiscal issues.

In most cases the project manager considers definitively concluded the execution of the project and is already fully dedicated to the realization of a new project, frequently in another hemisphere, having no memory of what happened in the previous work nor time (and interest) to reconstruct the events under dispute.

A proposal for how to abate biases

These are only some examples of parties’ cognitive biases which may negatively impact arbitration as the best method of disputes resolution, bearing in mind that a similar kind of assessment was carried out for outside counsel as well as for arbitrators.

I hereby refer to the literature on the subject without repeating what has been already said and written by eminent professors and lawyers.

My proposal regards a framework allowing us to recognize and manage our unconscious biases, enabling us to abate and prevent cognitive biases in arbitration. In order to avoid over–relying on the same familiar tools, the framework offers a possible new way for the legal community, as per Claudia’s suggestion.

The Inner Development Goals

A possible way to recognize and manage our unconscious biases consists in putting in place cognitive and behavioural processes directed to influence the nature, intensity, duration, and expression of the parties’ emotions, including a series of strategies to manage the latter: a process that can also be called "restructuring" or "re-evaluation" of emotions.

Is it pure theory or does any ongoing practical initiative in the international panorama exists?

The Inner Development Goals is a non-profit, open-source organization for inner development, researching, collecting, and communicating science-based skills and qualities that may help to live purposeful, sustainable, and productive lives. Together with more than 4000 scientists, experts and practitioners, Inner Development Goals developed a framework of the capabilities, qualities and skills that are needed to achieve the Sustainable Development Goals.

“Progress is not happening fast enough. Right now, it doesn’t look like we will reach the goals in time. There is an urgent need to increase our collective abilities to face and effectively work with complex challenges. This is why we are co-creating the Inner Development Goals”.

The European Parliament resolution of 23 June 2022 on the implementation and delivery of the Sustainable Development Goals in Section 50 of the related report “(…) underlines the importance of SDG 17 (partnerships for the goals); notes, in the framework of global partnerships and capacity building, the innovative role of open source initiatives, such as the Inner Development Goals initiative, that aim to educate, inspire and empower people to be a positive force for change in society, thereby accelerating progress towards achieving the SDGs”.

The Inner Development Goals prioritized objectives are:

1.   That decision makers within business, academia and civil society unite around the fact that human capabilities and skills are a prerequisite for sustainable and inclusive societies;

2.   To make internal development available for all individuals, through language, art and humour, despite background;

3.   To contribute to helping the planet reach the Sustainable Development Goals set by the United Nations.

The dimensions and skills of the Inner Development Goals

The Inner Development Goals framework represents five dimensions organising twenty-three skills and qualities of human inner growth and development, which are especially crucial to accelerate the achievement of the Sustainable Development Goals. Regarding in particular arbitration, to develop the necessary inner capacities, skills and mindsets of the parties to abate unconscious bias when facing a dispute.

I will focus in a practical manner on some specific skills in the framework and see how the development of said skills may improve the management of disputes and the resolution thereof in international arbitration.

First of all, “being” means “cultivating our inner life, developing and deepening our relationship to our thoughts, feelings and body, which help us be present, intentional and non-reactive when we face complexity”.

In this respect, our “inner compass” is fundamental in defining our values and purposes thus achieving the complete awareness necessary to avoid (or in some cases overcome) any kind of bias or emotional status whatsoever, negatively impacting on our daily activity. In particular, “assuming an openness and learning mindset” helps in overcoming the above – mentioned biases of over reliance and overconfidence, synonymous of the typical legacy of specialists or experts in a determined subject, who overestimate their knowledge and experience, despite background.

Secondly, “thinking” is “developing our cognitive skills by taking different perspectives, evaluating information and making sense of the world as an interconnected whole, it being essential for wise decision-making”.

In particular, “critical thinking” and “complexity awareness” are fundamental as a technique to avoid to excessively rely on our gut feelings, which normally happens when we are under time pressure in taking decisions with a relevant and long - lasting consequences under a strategical, economic and social perspective for the company; furthermore, “long - term orientation and visioning” may support in – house counsel in taking the decision whether to start an arbitration or open a negotiation with the counterparty to possibly achieve a settlement agreement.

“Relating” should be “appreciating, caring for and feeling connected to others, such as neighbours, future generations or the biosphere, helping us create more just and sustainable systems and societies for everyone”.

One of the skills in “Relating” is “Humility”, which sometimes may certainly help in moderating the aggressiveness of the various people involved in international arbitration having a win-win approach.

“To make progress on shared concerns, we need to develop our abilities to include, hold space and communicate with stakeholders with different values, skills and competencies”: this is “collaborating”.

In collaboration, “communication skills” intended inter alia as “the ability to really listen to others, to foster genuine dialogue”, should be applied from the very beginning of the negotiation of the contract up to a proper attention to our counterparty’s arguments, e.g. in the hearings during the arbitral proceedings; this may help to avoid the so called “confirmation bias” when we tend to emphasize data confirming our established beliefs or ideas and in the meantime discount data conflicting with our position.

“Co – creation skills” are fundamental to establish and facilitate collaborative relationships, aiming at reducing the possibilities to have opposed positions which may give raise to a dispute.

Eventually, “acting” highlights “qualities such as courage and optimism which may help us acquire true agency, break old patterns, generate original ideas and act with persistence in uncertain times”.

As an example, “courage” in making decisions and taking strategic actions is a key element to approach the counterparty to assess its availability to try to achieve an amicable solution of the dispute, without being feared because of the “first move paralysis”.

Last but not least, “creativity” intended as the “ability to generate and develop original ideas, innovate and being willing to disrupt conventional patterns” is fundamental in achieving the awareness necessary to eliminate any kind of bias and emotional status in performing any activity whatsoever.

SDG 16 Peace, Justice and Strong Institutions

What is the main purpose of any legal profession (e.g. in – house counsel, outside counsel, arbitrator, expert) in carrying out its job and implementing the Inner Development Goals categories and skills?

The achievement of the Agenda 2030 of the United Nations and its 17 Sustainable Development Goals.

As regards the legal field, Sustainable Goal 16 is about promoting peaceful and inclusive societies, providing access to justice for all and building effective, accountable, and inclusive institutions at all levels.

Furthermore, Target 16.3 requires promoting the rule of law at the national and international levels and ensure equal access to justice for all.

The role of the International Chamber of Commerce

It is worth noting that having established the International Chamber of Commerce in 1919, its founders, so called “Merchants of Peace”, recognised early on the need for an international dispute–resolving mechanism to enable trade to flow.

The ICC Court was inaugurated on 19 January 1923 and is nowadays considered as the world’s preferred arbitral institution, providing neutral and trusted services for businesses of all sizes, sectors and geographies to resolve, manage and avoid commercial disputes.

The role of the International Chamber of Commerce is therefore essential in achieving the Goal 16 and the Target 16.3 to ensure equal access to justice for all.

To mark 100 years of the International Court of Arbitration of the International Chamber of Commerce, on January 19 2023 a Declaration has been issued to set out a vision to lead dispute resolution for the next century.

As well as committing to the ICC Court’s purpose to enable access to justice and the rule of law, the Declaration sets out commitments and principles for the development of further pioneering ICC tools and services that aim to better serve the global dispute resolution community – including businesses of all sizes, sectors and geographies.

Having listed some of the typical cognitive biases of a party when facing and managing a dispute, and with a proposal of the development of the skills and capacities provided in the Inner Development Goals framework as a guideline to abate biases, the final remark is a caveat to all legal professionals and people involved in international arbitration: avoid to incur in the so called “blind spot bias”, to be intended as the tendency to see oneself as less biased than other people, or to be able to identify more cognitive biases in others than in oneself. This is the real risk when evidencing any kind of bias, despite the contest, but frameworks like the Inner Development Goals are very helpful in avoiding said risk.

Edoardo Marcenaro is head of legal and corporate affairs at Enel Grids