Can London win the battle of the arbitration centres?

The growth of international arbitration is a seemingly unstoppable force, and London has been among the biggest beneficiaries of its increasing popularity with big business.

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The International Arbitration Survey by Queen Mary University and White & Case, released in October 2015, found London was named by 45 per cent of participants as the most preferred and widely used arbitral venue. And the number of users naming London as their first choice disputes venue has been increasing steadily over the years: 50 per cent more participants named London last year than in 2010.

London’s relationship with international arbitration is ­mutually dependent as well as being mutually beneficial.

“Arbitration is a key reason why London is a pre-eminent legal centre, and the fact we’re a global hub is one of the reasons arbitration is doing so well in London,” says Three Crowns founding partner Constantine Partasides QC.

As London has continued to thrive as the dominant centre for international dispute resolution in the world, arbitration has become the preferred form of resolution for cross-border disputes.

“The big questions are – why arbitration, and why London,” says Linklaters’ Matthew Weiniger QC. “If you’re drafting an international contract you’re far more likely to choose arbitration over any single court jurisdiction, and over the past 20 years there’s been a huge growth of global trade. It’s as simple as that.

“So why London? We’re open to business. Arbitration sells itself on global neutrality, it’s a place where parties choose the rules with no real interference from an outside body. That is in line with London’s reputation for doing business generally.”

The foundations of the success of international arbitration in London are clearly defined.

“People trust London as a legal seat,” Partasides continues. “They have huge confidence in the quality of the judiciary and the independence of it; confidence in the quality and modernity of the legal infrastructure; and confidence in the legislation put in place in 1996. They also have confidence in the legal community. Few places boast as many lawyers from around the world working in the field.”

The capital is pre-eminent in the arbitration market for much the same reason its court system is favoured by litigating parties all over the world. It can in part trace its roots to the ubiquitous nature of English common law, the most widely used legal system in the world, covering 27 per cent of the world’s 320 legal jurisdictions.

But the benefits of London as a seat of arbitration go further than the lure of its courts.

“Our success is down to our infrastructure,” adds Hogan Lovells litigation and arbitration head Michael Davison. “We have a good legal framework that people understand and that’s supported by a pool of arbitrators and practitioners, plus the prevailing view that the English legal system is a good basis on which to contract. All of that is a big pull factor for London.”

English law is still the main choice of law for commercial contracts and companies are twice as likely to choose English law over other governing laws for arbitrations. The Queen Mary survey found English law was chosen by 40 per cent of companies for contracts and New York state law by 17 per cent.

“The Arbitration Act 1996 holds a lot of responsibility for how well London has grown as an international arbitration hub,” adds Hogan Lovells London head of arbitration Kieron O’Callaghan. “The basis of non-interventionist courts and, subsequently, that the commercial courts have been robust at maintaining the underlying ethos of the act, can’t be overstated.”

The reputation of London’s fair and consistent judiciary, its willing pool of thousands of highly qualified lawyers and continued investment in its commercial court system have also contributed to the fact that London is the venue of choice for some of the most complex and high-value international disputes in the world.

There has been a sharp rise in the number of commercial ­arbitration practices in London in the past decade. What was once the preserve of the magic circle has become the ­cornerstone of the growth of US law firm expansion in the City, and now pretty much every firm in The Lawyer Global Litigation 50 offers ­arbitration from its disputes practice.

Increasingly, the biggest and most lucrative commercial rows have come out of Russia, Asia and Eastern Europe. According to the Queen Mary study, 90 per cent of commercial disputes handled by London firms involve an international party, and around 80 per cent of the parties involved in arbitrations before the London Court of International Arbitration (LCIA) are from outside the UK.

“The pie is growing,” adds Weiniger. “Arbitration is such an attractive proposition for resolving international contract ­disputes that even if we continued to have the same market share, London would still be getting more work.”

However, London’s position cannot be taken for granted.

White & Case solicitor-advocate and partner David Goldberg says: “London has been one of the biggest winners out of the growth of massive international disputes, and it will continue to attract the highest value and most complex arbitrations unless steps are taken to push away these disputes.

“These steps include the current inaction by the Government to improve the quality of services and maintain the worldwide reputation of London as a legal hub in the face of rising centres in the East.”

The challenger centres and Brexit

Non-traditional arbitration hubs such as Singapore and Hong Kong are gaining momentum and attracting more and bigger claims.

“Rumours of London’s death amid Brexit have been greatly exaggerated”

– Peter Hirst

The Queen Mary survey found that while the  London Court of International Arbitration (LCIA) and International Chamber of Commerce (ICC) in Paris still dominate, more businesses now prefer the Singapore International Arbitration Centre (SIAC) and Hong Kong International Arbitration Centre (HKIAC) over the more mature seats of Geneva, Stockholm and New York, representing a significant widening of the playing field.

“Singapore is providing a real challenge to London and other centres,” says Davison. “The infrastructure’s slick and the SIAC is a business-minded institution. It’s getting a lot of work from China and India.

“There was a sense a few years ago that London could soon hear a lot of Indian disputes because of similarities between our legal systems, but it just hasn’t happened.”

O’Callaghan adds that the real challenge is the “threat of the pivot from Russia”, though that “remains to be seen”.

He adds: “There’s a query over whether UK sanctions against Russia will lead it to look more to Singapore, and that’s certainly been an expressed threat from major operations in Russia. We’re still seeing a lot of activity in London but Singapore is increasingly picking up Asian and Russian work. We’re seeing other jurisdictions try to market themselves as a hub for particular regions, such as Mauritius and Dubai ­positioning themselves as hubs for African disputes. That’s a welcome ­development but it’s some way off taking flight.”

SIAC’s relatively cheap price and the serious backing of its government gives it a chance to grow as a global seat, but even if it manages to close the gap on London, overtaking it as a venue is a distant dream.

However, Britain’s decision to leave the EU is increasingly shaping the debate, and it is difficult to ignore the Brexit issue when discussing arbitration, even if the overwhelming feeling is that it will have no material impact on London’s pre-eminence.

Some City arbitration lawyers have spoken of general counsel from big corporations receiving flyers from law firms in Singapore, Hamburg and Paris, among other European cities, suggesting that if they are looking out for shareholder interests, they will make sure their contracts are governed by a “stable and simple law”.

Much of this has been dismissed as “scaremongering”, or as Clyde & Co arbitration co-chair Peter Hirst puts it: “Rumours of our death have been greatly exaggerated”.

Another adds that major corporation general counsel are “a bit more clever than that”.

“Some jurisdictions are ringing the death knell for London, and it’s premature,” Hirst continues. “London has always been an arbitral centre, long before we went into Europe.”

There are “potential upsides” to Brexit on London’s arbitration market too, he adds.

“It’s encouraging a debate about our ability to manage ­bilateral investment treaty claims with other EU members without the interference of the European Court of Justice,” says Hirst. “There’s also a debate about the availability of antisuit injunctions that have been killed off within the EU. The reinstating of anti-suit injunctions depends on whether we still seek to be party to Brussels regulations after Brexit.”

Davison adds that other financial centres will take a pot shot at London over Brexit and that damaging London’s reputation “isn’t good for us and any of us who work here”.

“Since I’ve been a lawyer the UK has singularly failed to address costs of arbitration”

-Matthew Weiniger QC

Uncertainty of any kind can have a negative impact on the business world, and thus the lawyers that serve it, and the ongoing political and legal row over how and when Article 50 will be triggered is extending uncertainty.

“It’s too early to tell if Brexit will affect the arbitration market,” says O’Callaghan. “In the short to medium term I can’t see it having a significant impact on London. Judiciary, legal framework, specialists, confidentiality – these factors aren’t dependent on EU membership.”

The reform debate

Although most City arbitration specialists shrug off the ­perceived threat of Brexit, other issues that could prove ­problematic to London’s continued dominance in the global market weigh more heavily on their minds.

“The cost could definitely impact arbitration development in London,” says Weiniger. “London is a very expensive place to do arbitration, and it’s putting off a lot of people.”

Weiniger points to Germany, Austria, Denmark and Sweden as increasingly attractive alternatives.

“Their lawyers all speak wonderful English, the countries are extremely uncorrupt and the cost of doing arbitration is a third of what it is in London,” he says.

Indeed, the growing cost of arbitration is cited repeatedly as one of the biggest challenges to London as a venue, and lawyers routinely speak of clients who are “shocked” by the cost of holding an arbitration in the City, whether they win or lose their dispute.

“The costs are becoming prohibitive,” adds Hirst. “The institutions themselves are trying to limit costs as clients are becoming a lot more cost-conscious.”

The LCIA cannot take on all the burden of reducing costs, however.

“Since I’ve been a lawyer the UK has singularly failed to address costs of arbitration,” says Weiniger. “Once you have disclosure and lengthy cross-examination, the costs just rise.

“Clients deciding arbitration is a better product than litigation is one thing, but sometimes they just want the less-good option quicker and cheaper,” he adds.

While client costs skyrocket, some City lawyers are suffering the opposite problem, with many talking of a “price war” among arbitration practices in the capital leading to more fixed fees and tender processes for work.

“In the last month we have been asked to tender for three arbitrations and put in fixed-fee quotes,” says Hirst. “It’s an entirely new phenomenon, we haven’t done it before.”

The trouble with ‘secret’ hearings

The issues that could affect the growth of London ­arbitration are greater than just cost and how much lawyers are paid, ­however. The debate took an unusual turn this spring when Lord Chief Justice Lord Thomas made a speech before the ­annual BAILI lecture during which he said international ­arbitration was “retarding” the development of English common law by taking important cases out of the court system and before ‘secret’ hearings.

Lord Thomas’s controversial speech fed an ongoing row over the issue of transparency in both commercial and investor-state arbitrations, while coinciding with a number of think tanks and a public consultation on reform of the Arbitration Act 1996.

The City’s overwhelming response was that the large number of cases that settle could have negative repercussions on the development of the court structure in England and Wales. But possible reforms, particularly following allegations of “secret justice” and concerns about the level of self-regulation present in international arbitration, are still ripe for address.

“The Law Commission took the criticisms very seriously,” says White & Case’s Goldberg. “We as a firm are preparing our response to the public consultation, and of course it is time for a discussion over whether the act is too old.”

But Goldberg’s instinctive reaction is “don’t touch it”. The act is “so good, it gives us such an advantage in comparison to many other countries, many of whom are just updating their legislation now to make it more similar to ours,” he says.

Most commentators agree.

“I’m a fan of not tinkering with things, it leads to uncertainty – you go there at your peril,” says Davison, adding that lawyers and users have “got used to the act and its slightly quirky features”.

Altering the act’s points on the interventionist rights of the court would be a retrograde step, and could seriously impact the attractiveness of London as a seat.

But there is room for change.

“What I’d like looked at is the issue of summary judgments and procedures,” says O’Callaghan. “The ­statute needs to give the tribunals greater powers and comfort that they can determine something where appropriate on a summary basis. It would speed the whole process up.”

There are more technical issues to consider

“The future of London arbitration will be impacted in the same way as all legal services,” says Davison. “It needs to ­respond to developments in technology, such as ­artificial ­intelligence. There’s going to be an increasing push for ­innovative ways of delivering legal services, and that includes arbitration.”

Despite its flaws – both philosophical and procedural – ­arbitration is responding to a business need, and as long as global trade continues, arbitration will continue to grow.

“Arbitration isn’t perfect but most people who use it and its practitioners know this, and are constantly changing and amending the rules to try to improve the processes,” says Weiniger. “It’s much slower to get government to adapt legislation, but overall the outlook for our arbitration market is good.”

O’Callaghan is also cautiously optimistic: “I hope what we see soon is a more efficient process. We all know we have got to listen to our clients, and people will continue to use arbitration and come to London to do so only if it’s the best alternative.

“Most of the complaints come down to it being too expensive and too slow. In another 20 years’ time I think we can turn the needle.”