ADR Prof Blog has a post on the interesting topic of ADR and Norm Creation. In that post, the blawgger provides two rare examples of ADR in creating norms.
One of the complaints against ADR processes is that they undermine the rule or norm-creating role of adjudication. By taking disputes from the norm-creating sphere of public adjudication to private and confidential tribunals, the role of precedents and norm-creation are undermined. The problem is further complicated because the review of ADR decisions (in a generic sense of term), if any, are on the basis of possibility-standards and not on the basis of substantive correctness of the decision. We had discussed this issue in the sidelines while discussing the case of Sumitomo Heavy Industries v ONGC. There, we had commented:
"Though the SC's decision seems to be reasonable, it is sad that the court did not consider the law on the liability of a contractual party to bear increase in costs due to change of law during the currency of the contract. This is the problem with arbitration. The courts are forced to rule on whether the award was perverse or not rather than consider what should actually be the law on the issue. The main issue is taken outside the realm of the court. Essentially what the court has stated here is that Article 17.3 could either be narrowly construed like the Division Bench wanted it to be or broadly constructed as was done by the arbitrator. But what is the true law?"
The judiciary performs the important function of amplificiation of law. Amplification of law refers to the judiciary’s functions of filling the gaps that the statute leaves, making law in the absence of a statute, resolving contradictions in statutes and updating the law after taking into consideration the latest developments. (such as those of technology, etc) Girardeau A. Spann, in Expository Justice, 131 U. Pa. L. Rev. 585 (1983), argued:
[t]he exposition of law that occurs during the process of adjudication serves an important governmental function, which should be viewed as the primary function of courts rather than as a mere incident to the resolution of disputes. By explaining how legal principles produce particular results in particular factual contexts, courts give operational meaning to principles that would otherwise remain abstract, rhetorical and elusive.
This function of amplification of law does not take place in private arbitration for a few reasons. One reason is that there are no incentives for the arbitral tribunal to produce precedents as there exists difficulty in establishing property rights over them [See, William M. Landes & Richard A. Posner, Adjudication as Private Good, 8 J. Legal Stud. 236 (1979)]. There is no need for private judges to act in a precedent-creating manner as they are paid by the parties for rendering an impartial decision and not for amplifying law to guide future conduct. Also, creation of precedents by the private judge would mean that a future judge would free-ride on the previous judge who created the precedent in the first place without compensating his action of creating the precedent. The second problem with private arbitration is that the absence of review on merits of the award may lead to the production of inconsistent decisions on the same question of law leading to uncertainty of law. This would mean that parties would never predict outcomes of disputes and this would discourage settlement of disputes. The law in such a situation will be indeterminate and inaccurate [Posner , in another place, makes an identical point when he deals with the justification for appeal courts. He says that if the appeal courts gave deference to the trial courts on legal questions, law would be unpredictable as the trial court judges would disagree a lot, notwithstanding their quality. See, RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 643-644 (1998)]. Landes & Posner ask how requisite standardisation of law could be achieved in the absence of a single source for precedent production. This guidance function of the Courts in arbitration is clearly reflected in the case of CMA CGM SA v. Beteiligungs-Kommanditgesellschaft MS Northern Pioneer Schiffahrtgesellschaft MBH & Co (“Northern Pioneer”)  EWCA Civ 1878 where the Court of Appeal had to interpret the War Cancellation Clause of a standard form charter party. The War Cancellation Clause provided:
“In the event of the outbreak of war (whether there be a declaration of war or not) between any two or more of the following countries: The United States of America, the United Kingdom, France, Russia, the People's Republic of China, Federal Republic of Germany and any country of the EEC or in the event of the nation under whose flag the vessel sails becoming involved in war (whether there be a declaration of war or not), either the Owners or the charterers may cancel this charter.”
The court had to decide whether participation by Germany in the military operation at Kosovo amounted to war, thereby entitling the charterers to terminate the charter party. The majority of the arbitral tribunal had held that the events in Kosovo did not amount to “war” and therefore termination of the charter parties was wrongful. The interpretation of this clause was of public importance because almost all standard form charter parties contained this clause and the Court of Appeal had to decide whether the facts came within the scope of “war”. The Court held that the facts of this case demonstrated that changing circumstances could raise issues of general public importance in relation to such clauses that were not covered by judicial decision. The Court held that the changing circumstance in this case was in the nature of international conflicts and concluded that the arbitrators were wrong in holding that the military operation in Kosovo was not war as from a businessman’s perspective the military operation amounted to “war” (the Court , however, dismissed the appeal on other grounds). The decision evoked responses from various quarters and a solicitor’s in-house newsletter [cited in Hew R. Dundas, Appeals on Question of Law: Section 69 Revitalised, 69 Arbitration 172 (2003)] observed on the Northern Pioneer that:
"[s]o few arbitrated disputes now reach the courts that one wonders how English commercial law will develop, all appealed awards being private matters. This is particularly worrying in the context of some of our key markets, such as ship chartering and, of course, reinsurance, where standard form contracts or clauses are widely used, the effect of which impacts on many of our clients. In light of that, the decision of the Court of Appeal in [Northern Pioneer] was welcome".
Contrary to the popular opinion, the post in ADR Prof Blog suggests two examples of norm-creation through ADR processes. These examples seem to run counter to the general notion that ADR processes undermine norm-creation.
Example 1: There is a fresh perspective given in the academia to the Google Book Search Settlement. It seems the settlement has been a "quasi-public copyright reform". According to Paula Samuelson's paper (cited by the blawgger):
"An intriguing way to view the proposed settlement of the copyright litigation over the Google Book Search (GBS) Project is as a mechanism through which to achieve copyright reform that Congress has not yet and may never be willing to do... This Article... demonstrates that the proposed settlement would indeed achieve a measure of copyright reform that Congress would find difficult to accomplish. Some of this reform may be in the public interest. It also considers whether the quasi-legislative nature of the GBS settlement is merely an interesting side effect of the agreement or an additional reason in favor or against approval of this settlement."
Thus amplification seems to have occurred independent of legislation through the ADR process of negotiation and settlement.
Example 2: The second example that the blawgger cites is the case of the Official Unsecured Creditors of the Bayou Group against Goldman Sachs Execution and Clearing. The Bayou Hedge Funds Group was a hedge fund group created in 1996. Its investors were defrauded when their investments were misappropriated. Goldman's Sachs Execution and Clearing was the prime broker and clearing house for the Bayou Funds. The Unfficial Unsecured Creditors of the Bayou Group initiated arbitration against Goldman Sachs Execution and Clearing alleging that the clearing house knew about the fraud committed by some in the Bayou Group against its investors and had therefore facilitated fraud. In the arbitration conducted under the aegis of the Financial Industry Regulatory Authority (FINRA), the three member tribunal ruled against Goldman Sachs Execution and Clearing. Goldman tried to get the award vacated in the District Court but didn't succeed. The blawgger has cited a New York Times article which suggests that, "if upheld, the award could raise the standard among banks for clearing trades.the award could raise the standard among banks for clearing trades."
Notwithstanding the above two instances, there seems to be some merit in the criticism that confidential ADR processes undermine the court function of amplification of law. In the Google Settlement case, the dispute was initially filed as a class action lawsuit, the settlement was widely publicised. Thus, it was a "precedent" in the sense that the settlement was probably the first of its kind. Similarly, the FINRA award against Goldman Sachs was publicised (probably as per the legal requirements in the US). Assume for a moment that S 69 of the UK Arbitration Act did not exist, what would have happened in the case of CMA CGM SA v. Beteiligungs-Kommanditgesellschaft MS Northern Pioneer Schiffahrtgesellschaft MBH & Co? The term "war" would have, then, been interpreted to mean a "declared war" as opposed to war from the businessman's perspective.