The rise and rise of international arbitration

Answer

By and large, commercial parties continue to prefer litigation as the procedure of choice to resolve their disputes. This will be of no surprise, especially across Western markets. However, arbitration continues to mount a challenge as the alternative of choice.

Indeed, the recent figures released show a positive trend even in spite of covid-19; in fact, the need to hold hearings virtually has likely contributed to arbitration’s continued rise in popularity given its rapid uptake of the new virtual norm. Since 2017, whether measured by appointment of arbitrators or the caseload on arbitral bodies, there has been steady growth, and when examining the six largest arbitration forums the industry is edging ever closer to the 5,000 cases a year mark.

Commentators argue this is testament to the flexibility, relative lower cost and speed of the process over the alternative of protracted litigation. These benefits certainly have a part to play in Western markets where litigation remains the incumbent, but much of the growth is also owed to Asia where parties increasingly use arbitration for complex, high-value disputes, partly because of its privacy and neutrality; and partly to avoid overloaded court systems (which might also lack commercial sophistication).

Resolution

The subject matter of the disputes referred to arbitration vary greatly but a considerable proportion relate to issues arising from international commerce, of which shipping and commodities claims are a main staple. There is also a great degree in variance in the value of disputes and arbitral forums are playing catch-up against courts that offer quick resolution in the form of summary judgments or a fast track procedure on lower value claims. The International Chamber of Commerce (ICC), London Maritime Arbitrators Association (LMAA), and others have sought to offer expedited procedures for such small value disputes and this trend continues in other forums that are looking to increase the costs-to-value proposition offered to their users.

The LMAA, for one, says its offering is working, with record numbers taking up their Small Claims Procedure process for quicker results. The ICC is also on a drive to promote its expedited arbitration procedure under their new leadership.

A further trend has been emerging over recent years where, no doubt wary of costs, parties have generally moved towards sole arbitrator panels. The London Court of International Arbitration (LCIA), for example, in figures released for 2020, demonstrated a ratio of 1.2 arbitrators per panel, a somewhat significant drop from 1.6 just five years ago. It’s unclear if an uptick in smaller claims is responsible for this trend but it remains testament to the flexibility of the process for user choice and how they wish to conduct their claims.

Statistics, statistics, statistics

There is much to laud with the growth seen but eyes have been fixated on South-East Asia for some time, and for good reason. Singapore continues to be a big winner both by volume through the door and, increasingly, in prestige, challenging the dominance of London. In a 2021 study by Queen Mary University of London, Singapore came joint top when some 1,200 international lawyers and arbitrators were canvassed as to their preferred seat of arbitration.

Singapore is capitalising on its proximity to the Chinese and Indian markets, where a large proportion of its cases are sourced and there appears to be no shortage of supply. The total value of claims it heard in 2020 amounted to a staggering US$8.5 billion. In a double blow for London, and indeed the UK, the law of preference in foreign seated jurisdictions also appears to be slipping away from English law. In Hong Kong, the Hong Kong International Arbitration Centre has reported 99.4% of its arbitrations chose Hong Kong as the seat of the arbitration with Hong Kong law also selected as the governing law in the vast majority of those cases.

There are other challenges, too. State involvement has increased where governments seek to retain control over their dispute forums. At one end, Singapore has the benefit of an active government continuing to promote it as a hub for international dispute resolution. On the other, the UAE, just this September by decree from the Dubai’s ruler Sheikh Al Maktoum, abolished the Dubai International Arbitration Centre’s operative relationship with the LCIA. The move follows a raft of changes by the government to modernise its rules and regulations and, in this case, to bring arbitration under a single roof.

A new order

The past few years have yielded much by way of economic and political turbulence which have undoubtedly greatly benefited the case for arbitration.

The UK’s withdrawal from the EU, for example, left many questions open about how the nature of legal proceedings would continue to work between member states and the UK itself. With the transition period now firmly in rear-view, the Recast Brussels Regulation is no longer applicable and nor are the concepts of mutual recognition in the enforcement of judgments or provisions on jurisdiction applicable, either.

Trade between the UK and the EU remains significant, yet the silence remains disconcerting on how the UK and EU plan to harmonise dispute resolution via the courts. The victor from this stalemate is arbitration which, for the most part, circumvents these issues by virtue of enforceability through the 1958 New York Convention to which all EU member states, and the UK, are party to.

It has also been a well-demonstrated trend that the disputes market booms during financially uncertain times with businesses seeking the recovery of cash – the pandemic has been no exception.

However, covid-19 also proved to be greatly disruptive on international trade leading to widespread defaults on, among other things, payment provisions in commercial contracts and force majeure declarations triggered by governments scrambling into mandatory lockdown. The uptick in disputes has been tangible and with arbitration already the mode of preference in the sector, it further accelerated the growth in casework in front of tribunals.

Indeed, while it could be conceded that international trade has already demonstrated a preference for arbitration, the reasons for this being the case should appeal to commercial parties across all sectors.

For one, the ease of enforcement of awards across borders gives users strong certainty of finality. Moreover, the ever-increasing body of sophisticated arbitrators to choose from, who are often experts in their fields, and who can provide fair and impartial awards, acts as a further notable point of attraction. Confidence can also be derived from the protection afforded to commercial sensitivities on the disputes, with proceedings and awards remaining confidential.

The disruption on day-to-day operations is also kept minimal. Parties often elect to forgo the unduly burdensome disclosure rules in litigation when arbitrating, as these require great expense and manpower dedicated to the task. The result is fewer procedural hurdles and a quicker sprint to a final determination.

In spite of the challenges, therefore, it’s clear that there are a growing number of businesses that have examined their options for resolving their disputes and that have elected to use arbitration. The figures show a demonstrable growth of international users who place their trust in the system, and this will certainly act to reassure new entrants, across sectors, when considering the choices at their disposal.

Richard Power is a partner and Robin Bandar is an associate at Clyde & Co LLP.