Rebalancing the relationship between the courts and arbitration

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

In March 2016 the Lord Chief Justice of England and Wales, Lord Thomas, delivered a lecture to the British and Irish Legal Information Institute (BAILII) entitled "Developing Commercial Law through the courts: rebalancing the relationship between the courts and arbitration". The theme of it, in summary, was that in order to support the rule of law in the UK and the free trade for which it provides a framework, the UK must allow more jurisprudence to develop through appeals from arbitrations. In the view of the Lord Chief Justice, jurisprudence has historically developed from both litigation and from arbitration. However, with the passing of a series of arbitration acts from 1979 until 1996, the possibility for appeals from English-based arbitrations was narrowed significantly, to the extent that there are almost no appeals that make it into the court system. He points out that there have emerged a number of commercial courts in other jurisdictions – including Dubai, Singapore, Abu Dhabi and Qatar to name but a few – and that he thinks they should all form a commercial court forum with a view to the common interest of upholding the rule of law and seeking to promote the development of law to keep pace with change in international markets, trade and commerce. He recognises that these courts need to maintain their independence and competitiveness but that they do have common goals.

Lord Thomas points out that decision-making in the courts plays a vital role because it:

1. enables the law to develop in the light of reasoned argument, which itself is tested before a number of tiers of the judiciary;
2. enables public scrutiny of the law as it develops. Scrutiny can lead to public debate or debate in the commercial market place, and this can bring the issue back to the courts or to parliaments if necessary; and
3. ensures that the law’s development is not hidden from view – publicly articulated laws and precedents are the basis from which markets and market actors can organise their affairs and business arrangements.

Historically, as recently as the 1970s, arbitrations in the UK could be appealed into the court system as a result of a special case procedure. Apparently, any party could generally get the court to resolve points of law by requiring the arbitrator to state a case on the question of law for the opinion of the court. Lord Thomas states that this meant that "the court’s diet of commercial cases was maintained notwithstanding the use of arbitration". This led to a multiplicity of appeals from arbitrations, as well as all the attendant delays.

In the 1979 Arbitration Act (the 1979 Act) Parliament replaced the special-case procedure with a right of appeal with permission of the court, as well as the right to contract out of the right of appeal save in certain restricted categories of case. In a case which came before the Court of Appeal, the Nema, a strict interpretation was placed on the 1979 Act rights of appeal, and these guidelines were effectively codified into section 69 of the 1996 Arbitration Act (the 1996 Act), which also abolished the special categories where contracting out was not permitted.

Here is part of section 69:

"69 Appeal on point of law.

(1) Unless otherwise agreed by the parties, a party to arbitral proceedings may (upon notice to the other parties and to the tribunal) appeal to the court on a question of law arising out of an award made in the proceedings.
An agreement to dispense with reasons for the tribunal’s award shall be considered an agreement to exclude the court’s jurisdiction under this section.
(2) An appeal shall not be brought under this section except—
(a) with the agreement of all the other parties to the proceedings, or
(b) with the leave of the court.
The right to appeal is also subject to the restrictions in section 70(2) and (3).
(3) Leave to appeal shall be given only if the court is satisfied—
(a) that the determination of the question will substantially affect the rights of one or more of the parties,
(b) that the question is one which the tribunal was asked to determine,
(c) that, on the basis of the findings of fact in the award—
(i) the decision of the tribunal on the question is obviously wrong, or
(ii) the question is one of general public importance and the decision of the tribunal is at least open to serious doubt, and
(d) that, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the court to determine the question…"

As a consequence of the 1996 Act there have been far fewer appeals. Lord Thomas believes that the number has been reduced to 19 permissions being granted in the whole of 2015. He claims that the diminishing number of appeals compounds the problem caused by the diversion of claims from the courts to arbitration in the first place. The reforms intended to bolster London as a dispute resolution centre have in fact undermined it, in his view, by reducing the development of jurisprudence. He reports that there is a real concern which has been expressed to him at the lack of case law on standard form contracts and on changes in commercial practice.

This ignores the fact that parties are free to choose to litigate, rather than arbitrate, when they are negotiating contracts with each other, and they could even choose to litigate at the time of the dispute if both parties consider it would be better than arbitration.

The judge goes on to explain how a couple of innovations have attempted to address the perceived lack of attractiveness of the litigation process. The first of these is a market test scheme which enables parties to seek declaratory relief where there is no present cause of action and the second is a shorter trial procedure with a maximum length of trial of four days. He claims that these are important steps that have been taken to make litigation more attractive in terms of costs, efficiency and the ability to provide high-quality judgments in good time.

However, in our experience, costs and speed aren't necessarily the motivating factors for choosing to arbitrate – other highly motivating factors are confidentiality and much wider enforceability under the New York Convention. In fact, cost is certainly not an advantage for arbitration over the court system, as arbitration usually turns out to be even more expensive, particularly where the parties have elected to have a three-person panel, to which the cost of the hire of the arbitration rooms must also be added. The judge does address these subjects but not in a wholly satisfactory way, probably because judges are not surprisingly less exposed to the commercial and practical realities of what clients really think about these issues.

In any event, he concludes by suggesting that the UK went too far in 1979 and in 1996 to favour arbitration over the development of the common law, and that this imbalance should be redressed.

In The Times of 28 April, Lord Saville of Newdigate, a former law lord and Supreme Court Justice who now sits as an arbitrator, and another titan of the legal world, responded to the Lord Chief Justice’s speech. Lord Saville favours the suggestions that would increase the attractiveness of the courts as the forum for dispute resolution over arbitration, but he does not favour changing the appeal provisions in the 1996 Act. In part, that is no doubt because he was the chair of the committee that prepared that bill which became law, but also he still thinks that that was the right course. Participants to arbitration still want certainty and do not want the possibility of endless appeals, which leads to long delays and ongoing legal costs. Lord Saville expresses the view that "From the international point of view, any suggestion that the English courts be permitted to interfere in the arbitral process by substituting their decisions for those of the tribunal chosen by the parties is regarded with little short of astonishment….I have no doubt that any move to expand the right of appeal from arbitration awards would be a wholly retrograde step. Far from helping to develop English law, it would be calculated to drive international commercial arbitration away from London, to the great loss of the country."

We share Lord Saville’s views, but we would welcome your feedback if you have a view on this subject.