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6 November 2013
The defining features of the truly successful arbitration are discretion, speed and economy. In theory that is, but in practice it is not always so straightforward.
Such qualities seemed in short supply in last week's acrimonious divorce of accountancy giant Arthur Andersen and its professional service group Andersen Consulting. Break-ups are never easy and this case is no exception.
Arthur Andersen's global chief executive Jim Wadia resigned only hours after the arbitrator ruled that the consultancy would not have to pay a $14bn (£9.3bn) termination fee to break free from its partner. The arbitration began two-and-a-half years ago and during the course of the highly public showdown there were plenty of accusations of corporate betrayal. Press speculation estimated that the legal bill on the Andersen case could be as high as $120m (£80bn).
Such mega-arbitrations are big business for lawyers - and are becoming increasingly common as the international business world is swept along by the forces of globalisation. Eversheds arbitration partner Geoff Prevett says: "Cross-border trade invariably involves more arbitration and less litigation. No company wants to submit itself to the jurisdiction of the other guy's legal system - it somehow feels severely disadvantaged."
Arthur Andersen held its arbitration in Paris under the rules of the International Chamber of Commerce (ICC). It was a clash of two New York law firm titans - Weil Gotshal & Manges advised the accountants and Simpson Thacher & Bartlett acted for the consultants.
But London has a growing reputation on the world stage as a centre for arbitration services. The City's profile was raised by the opening of the International Dispute Resolution Centre in February. For the first time there is a venue designed with the sole purpose of resolving disputes and parties will now be able to move out of the anonymous hotel suites or restaurants in the West End.
In a report into the growing domestic arbitration market published earlier in the year, British Invisibles, a trade organisation representing the service industries, estimates that 5,000 disputes are resolved in the capital each year. According to the report, 70 arbitrations took place under the rules of the London Court of International Arbitration (LCIA), the country's foremost arbitration body. Most claims involved parties from outside the UK and awards ranged from $150,000 (£100,000) to $5bn (£3.3bn).
The ICC - the world's leading arbitration body - whose headquarters are in Paris, has also increased its presence in London. In 1998 there were 50 ICC arbitrations in the capital, representing an increase of almost 100 per cent on the three preceding years.
Interest in the UK as a venue for resolving international disputes dates back to the Arbitration Act 1996, which put a languishing London back on the arbitration map.
Toby Landau, a barrister at Essex Court Chambers who was seconded by the Department of Trade and Industry to assist in the initial drafting of the act, says: "We had a reputation for having courts that were too intrusive and so if you came to the UK the chances were that arbitration might not be very fast and efficient and might end up in court anyway."
The legislation has put the UK back on the "preferred list" for arbitration work, claims Audley Sheppard, an arbitration partner at Clifford Chance. "There is now a mandate for arbitrators to act efficiently, quickly and commensurate with the amount of the dispute, and there is also a very limited amount of interference in the process," he says.
Lawyers report that an increasing number of foreign disputes in international business are being referred to London. Gautam Bhattacharyya, a commercial disputes and arbitration partner with Richards Butler, is representing the American Film Market Association in an arbitration. Even though the arbitration will be conducted under the trade body's rules and the parties are from the US, it will take place in London.
According to Bhattacharyya this is because "the jurisprudence here is tough and we have good arbitrators". Bhattacharyya adds that "almost all" the agreements that his firm are instructed to act on cite UK law as the governing law and specify London as the place for arbitration.
Nigel Blackaby, a lawyer in Freshfields' Paris office and co-founder of the Young International Arbitration Group, says that English is becoming the lingua franca of arbitration. "Most disputes are resolved and most contracts are written in the English language even if there are no English or US parties," he says.
However, for the leading City players most arbitrations still take place outside the City. Blackaby says that London and Paris-based arbitrations make up only half of the department's workload. His firm is currently working on disputes in Stockholm, Zurich, Miami and Brazil.
City law firm arbitration practices are being kept busy with the fallout from inward investment projects in the emerging economies. Blackaby says: "Four-and-a-half years is the average time between a contract being signed and arbitration clause being relied upon."
A steady influx of work is coming from bilateral investment treaties struck between two states which encourage inward investment by offering protection for investors from national governments. According to Blackaby, there are 1,500 such treaties and at present Freshfields has eight such disputes on its books, which include one case acting for an African government, two cases against eastern European governments and one against a Middle Eastern government.
Prevett reports a rise in work from the republics of the former Soviet Union and China. "In the old days of communism the state would decide the dispute for you," he says. "Since they have introduced capitalism more investors are putting arbitration clauses [in contracts] because they don't want to find themselves before a Russian or Chinese court."
Much of the work that Landau sees passing through London involves "politically charged" foreign investment work where foreign investors are threatened with corruption and fraud charges from local governments. Typically, the work relates to disputes over large infrastructure projects.
In April, Landau spent a month at the Supreme Court in Islamabad fighting an injunction against a London arbitration over a $3bn (£2bn) power plant following corruption allegations.
Lawyers report that more instructions are coming from outside traditional sources of dispute such as construction and engineering. Clifford Chance's Sheppard identifies an increasing preference for arbitrations in areas of law as diverse as intellectual property, trade secret and competition law disputes.
Lovells arbitration partner Michael Davison says that financial institutions and international corporations are also seeing the appeal of arbitration. "You choose your neutral venue and your neutral judge, keep it nice and quiet and have a tremendous amount of procedural flexibility about how you resolve it."
Prevett agrees that the arbitration message is getting through to the business world. Parties do not want their cases driven by a "pro-active judge", he says, but want to retain control over the process. "People are getting out of the courts and before the tribunals."
Arbitration can be administered by an institution under its own rules - such as the London Court of International Arbitration (LCIA) or the International Chamber of Commerce (ICC) - or can be conducted on an ad hoc basis under procedures agreed between parties.
The LCIA provides an international dispute resolution service under its own rules and also under the United Nations Commission on International Trade Law (UNCITRAL), which models law rules for operation under any system of law and in any venue throughout the world.
In 1998, 70 arbitrations were resolved under LCIA's auspices representing a 35 per cent increase on 1997 and a 95 per cent increase on 1996. Of the cases administered by LCIA, 90 per cent involved non-UK parties.
The ICC court has its headquarters in Paris and arbitrations take place in more than 40 countries. It has a UK committee and in 1998 there were 50 ICC arbitrations in the UK. In the same year, the committee appointed 107 arbitrators - more than any other country.
In 1999, the ICC received requests for arbitration from 107 countries concerning 1,354 nations. The amount of the dispute exceeded $1m (£665,800) in 58 per cent of the cases.
Other leading national arbitration institutions
According to leading arbitration barrister Toby Landau, a "language of acronyms" has grown around international arbitration with every country having its own bodies. For example, in the US there is the American Arbitration Association (AAA), in Sweden there is Stockholm Chamber of Commerce, which is a popular venue for disputes arising out of investment into central and eastern Europe, and in the Far East the leading body is the Hong Kong International Arbitration Commission (HKIAC).
"You can no longer take it for granted that arbitrations will stay in the major centres," says Landau. "It's very important that London maintains its reputation." Landau believes that many clients are dissatisfied with the ICC as it is seen as expensive and bureaucratic.
The LCIA's registrar Adrian Winstanley agrees. He says that the critical difference between the LCIA and the ICC is that the ICC has an ad valorem charging mechanism based on the aggregate value of the claim and counter-claim. The LCIA charges according to the time spent on the case by the LCIA secretariat and tribunal.
The International Dispute Resolution Centre
The centre was established this year and was launched by the LCIA, the Chartered Institute of Arbitrators and a number of trade and industry arbitration groups. It shares premises with the LCIA and houses seven arbitration suites.
According to Winstanley, the opening of the centre is a response to the increased demand for arbitration services. "It was opened with private resources not because it was an investment but as an expression of a belief in the private settlement of disputes. It has to do with people saying that they believe not only in the process but the service lawyers offer in the process." Baker & McKenzie, Clifford Chance, Freshfields, Herbert Smith, Masons and Rowe & Maw are reported to have each bought a £5,000 to £10,000 stake in the centre.
Chartered Institute of Arbitrators
The institute is a professional body based in London with more than 9,000 members in 84 countries around the world. It provides education, training and qualification for arbitrators.
THE ANDERSEN ruling
The judgment, by arbitrator Dr Guillermo Gamba at the Paris-based International Chamber of Commerce, brings to an end two-and-a-half years of bitter divorce proceedings between Andersen Consulting and Arthur Andersen. The result of the arbitration, originally filed in December 1997, is effectively a victory for Andersen Consulting which has avoided paying a termination fee of $14.5bn (£9.3bn). However, it will lose all rights to the Andersen Consulting name which the accountants will be able to adopt from 31 December. Andersen Consulting will also have to make a final payoff of around $1bn (£664m).
Only hours after the ruling, Arthur Andersen's global chief executive Jim Wadia resigned. Louis Salvatore, chairman of the Arthur Andersen oversight committee of the Andersen Worldwide board of partners, has been made interim global managing partner. An official replacement will be made within 90 days.
Arthur Andersen and Andersen Consulting first became autonomous in 1989 but continued to share revenues and governance structures under umbrella organisation Andersen Worldwide. Since then, Andersen Consulting's growth has far exceeded that of its accounting sister. Last year's revenues were $9bn (£6bn) - five times the 1989 figures - while in the same period Arthur Andersen's revenues have only tripled to $7.5bn (£5bn).
Arthur Andersen is not alone in splitting from its consultancy arm - KPMG's consultancy arm is due to break from the auditing division of the big five firm later this year, while Ernst & Young has already sold its consultancy arm to Cap Gemini. Once divested of the auditing element, consultancies are free from constraints on raising capital and conflict of interest rules imposed by US regulators. KPMG's consultancy arm is to seek an IPO later this year with Andersen Consulting expected to follow.