International Arbitration in London Post Brexit: Business as Usual

Unless and until the United Kingdom (UK) formally leaves the European Union (EU), the Brexit vote – which has political and historical significance, but is not legally binding on government[1]– will have little impact on London’s status as a centre for international arbitration.

The withdrawal process itself is contemplated by Article 50 of the Treaty on the Functioning of the European Union (TFEU).  Untested to date, it is a once-and-for-all decision and a process that falls to be decided pursuant to the UK’s “own constitutional requirements”.[2]

Constitutional law experts have advised that, in order for the EU referendum result to be given effect, an act of the UK Parliament is required to allow Article 50 to be triggered and the UK formally to leave the EU.[3] This entails that a Bill should be presented for debate before Parliament, and approved in the same form by both the House of Commons and the House of Lords.

This view rests on the basis that triggering Article 50 TFEU without an act of Parliament (for example, as has been mooted in the press, by a declaration of the Prime Minister) would contravene the terms of the European Communities Act 1972, the statute providing for the UK’s membership of the EU and for the EU Treaties to have effect in domestic law, and thereby be open to challenge by way of judicial review.

Consequently, any formal departure of the UK from the EU is not realistically contemplated for the immediate future.

The immediate future is marked by a falling sterling, an unsettled economy and uncertain financial markets.  These woes may indirectly benefit international arbitration: London becomes a cheaper, and thus more attractive, venue for hearings, and we may see an increase in arbitral disputes as parties seek to invoke Brexit to trigger “material adverse change” and similar clauses in their contractual agreements.  As the Brexit dust settles, the Arbitration Act 1996 remains unaffected, the UK is a party to the New York Convention 1958 in its own right, English law retains its desirability as the governing law of choice in commercial agreements, and London’s sophisticated infrastructure for handling international disputes and its legal talent and know-how stay firmly in place.

Looking into the future at the hypothesis of a formal UK withdrawal from the EU, one stares at a legal landscape harking back several decades.  Without the Rome I Regulation on the law applicable to contractual obligations (593/2008), choice of law issues will revert to common law rules.  The non-application of the Brussels Regulation (recast) (1215/2012) will not affect arbitration, which remains outside its scope.  However it will mean no reciprocal enforcement of judgments in the EU legal space and no deference to the court first seised, therefore possibly encouraging the strategic use of the “jurisdiction race”, a proliferation of arbitration-related court proceedings – and the potential resurrection of the anti-suit injunction.  The disappearance of the EU Insolvency regime will not assist with the considerable challenges presented to international arbitration by a party subject to pending insolvency proceedings.[4]

Withdrawal from the EU may also toll the end of the UK in its current incarnation.  Scotland and Northern Ireland have voted massively in favour of remaining in the EU and they may not wish to remain part of the UK in the event of withdrawal.[5]

The prospect of a dismembered Britain (no longer the UK) out of the EU is arguably more threatening to international arbitration in London than is the Brexit vote itself.  It is an open question whether Britain in its new incarnation could readily take up the place of the UK as a party to the New York Convention, which counts over 150 state parties and is widely recognised as the most important selling point of international arbitration.

Recent public pronouncements from Lord Thomas, the Lord Chief Justice of England and Wales, may also cause one to wonder whether the UK Supreme Court, the country’s highest judicial authority, prefers to see commercial arbitration heading back to an era pre-dating the Arbitration Act 1996.

In a Lecture held by the Trustees of the British and Irish Legal Information Institute (BAILII) on 9 March 2016, entitled “Developing commercial law through the courts: rebalancing the relationship between the courts and arbitration”,[6] Lord Thomas forcefully advocated in favour of more robust court intervention in arbitration.  The Arbitration Act 1996 is premised on the tenets that “the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest” (s. 1(b)) and  “in matters governed by this Part the court should not intervene except as provided by this Part” (s.1(c)).

Lord Thomas stressed that, in taking place behind closed doors, arbitration “reduces the potential for the courts to develop and explain the law. This consequence provides fertile ground for transforming the common law from a living instrument into, as Lord Toulson put it in a different context, “an ossuary”.”[7]

He concluded, “My view is clear. In retrospect the UK went too far in 1979 and again in 1996 in favouring the perceived advantages for arbitration as a means of dispute resolution in London over the development of the common law; the time is right to look again at the balance. There is also a need to examine whether other markets would be prepared to follow the financial markets, to waive arbitration in cases where there were significant points of general interest and to appreciate that not only would their own dispute, in the right case involving legal issues, be better determined in a court but, more importantly, the wider interests of their industry and of the common law in general would be much better served by more issues being resolved in court and the law thus developed and clarified.”

Reactions to Lord Thomas’ speech have roundly condemned his views as “wholly retrograde” and out of step with commercial reality.  Commentators, including former judges, have pointed out that international disputing parties should not “be obliged to finance the development of English commercial law”.[8]

Views such as those expressed by Lord Thomas count amongst the very reasons why arbitration is preferred to the courts in cross-border commercial agreements.

Looking at the likely long lead-in time to a UK exit that is not a foregone conclusion, and in light of “the not inconsiderable, and measurable, economic benefit that befalls arbitration-friendly jurisdictions”,[9] estimated in 2009 at some €4 billion for the EU by the European Commission,[10] it makes sense to take advantage of that time to consolidate London’s position as a worldwide arbitration hub and reassure users that it is business as usual.  Taking a long hard look at the criticisms voiced by users – time, costs, diversity deficit, the perceived reluctance of tribunals to engage in proactive procedural handling[11] – and addressing them in a practical and commercial manner would make for a good starting point.

London has its own arbitration image.  It has withstood the test of time and will withstand a post Brexit landscape.  London’s features are distinctive and different from the hallmarks of Paris, Geneva or Stockholm.  They include the adaptability and commercial-mindedness of the common law, an enlightened judiciary, a critical mass of legal and forensic expertise, and world-class facilities.  London remains open for business, with or without the EU.

 

[1] The European Union Referendum Act 2015 is silent on the issue.

[2] “1.       Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.

2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.

1. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.”

[3] See notably N Barber, T Hickman, J King, “Pulling the Article 50 ‘Trigger’: Parliament’s Indispensable Role”, U.K. Const. L. Blog (27 June 2016) at https://ukconstitutionallaw.org/2016/06/27/nick-barber-tom-hickman-and-jeff-king-pulling-the-article-50-trigger-parliaments-indispensable-role/

[4] The conflicting decisions of the English and Swiss courts on whether an arbitration should be stayed pending the outcome of insolvency proceedings affecting one party in the case between Elektrim SA and Vivendi (Syska v Vivendi SA [2008] EWHC 2155 (Comm) and on appeal [2009] EWCA Civ 677; Swiss Supreme Court, Decision 4A_428/2008 of 31 March 2009) illustrate the important challenges facing international arbitration in this context.

[5] “Where was the EU referendum won and lost? Northern Ireland, Scotland and London only areas not to vote for Brexit”, The Telegraph, 27 June 2016 at http://www.telegraph.co.uk/news/2016/06/24/what-can-we-learn-from-the-eu-referendum-results/

[6] http://www.bailii.org/bailii/lecture/04.pdf

[7] “The effect of the diminishing number of appeals compounds the problem that arises from the diversion of more claims from the courts to arbitration. It reduces the potential for the courts to develop and explain the law. This consequence provides fertile ground for transforming the common law from a living instrument into, as Lord Toulson put it in a different context, “an ossuary”.  Here lies the irony. As I have explained reform was effected to promote the use of London as a centre for dispute resolution largely based on contracts based on the common law as developed in the Commercial Courts of London. However, the consequence has been the undermining of the means through which much of the common law’s strength – its “excellence” was developed – a danger not merely to those engaged in dispute resolution in London, but more importantly to the development of the common law as the framework to underpin the international markets, trade and commerce.

Quite apart from this major issue, there are other issues which arise from the resolution of disputes firmly behind closed doors – retarding public understanding of the law, and public debate over its application. A series of decisions in the courts may expose issues that call for Parliamentary scrutiny and legislative revision. A series of similar decisions in arbitral proceedings will not do so, and those issues may then carry on being taken account of in future arbitrations. As has been put: Arbitration confidentiality perpetuates public ignorance of continuing hazards, systemic problems, or public needs . . .28 Such lack of openness equally denudes the ability of individuals, and lawyers apart from the few who are instructed in arbitrations, to access the law, to understand how it has been interpreted and applied. It reduces the degree of certainty in the law that comes through the provision of authoritative decisions of the court. As such it reduces individuals’ ability to fully understand their rights and obligations, and to properly plan their affairs accordingly.”

[8] England: Former Supreme Court Justice calls Lord Thomas’ arbitration proposals ‘wholly retrograde’: http://www.scottishlegal.com/2016/04/28/england-former-supreme-court-justice-calls-lord-thomas-arbitration-proposals-wholly-retrograde/

[9] S Nappert, Escaping From Freedom? The Dilemma of an Improved ISDS Mechanism, The 2015 Inaugural EFILA Annual Lecture, 26 November 2016, at http://efila.org/wp-content/uploads/2015/11/Annual_lecture_Sophie_Nappert_full_text.pdf

[10] Commission Staff Working Paper, Impact Assessment, Accompanying document to the Proposal for a Regulation of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, COM (2010) 748, SEC (2010) 1548, 14 December 2010, at page 35.

[11] 2015 International Arbitration Survey: Improvements and Innovations in international Arbitration (QMUL – White & Case): “”Cost” is seen as arbitration’s worst feature, followed by “lack of effective sanctions during the arbitral process”, “lack of insight into arbitrators’ efficiency” and “lack of speed”. The majority of respondents do not favour an appeal mechanism on the merits in either commercial or investment treaty arbitration.  A growing concern in international arbitration is a perceived reluctance by tribunals to act decisively in certain situations for fear of the award being challenged on the basis of a party not having had the chance to present its case fully (“due process paranoia”)”. See http://www.arbitration.qmul.ac.uk/research/2015/.