The UK’s Lord Chief Justice raised eyebrows in the legal profession in March, 2016 when he suggested that the growth of arbitration was hindering the development of common law. Lord Thomas of Cwmgiedd said that the UK took something of a wrong turning in 1979 and 1996 when it brought forward measures to make arbitration more attractive to the international market. The changes in the seventies and nineties focused on limiting the number of appeals which would come out of the arbitration process to be heard by a judge, thereby giving more finality and certainty to arbitration awards. But the unintended consequence, according to Lord Thomas, has been that a lack of commercial cases reaching the courts has hindered the development of common law.
"… The clear consequence that can be seen today is that far fewer developments of the law are made in areas where the probability is that the case has had to begin in arbitration," he said.
"As arbitration clauses are widespread in some sectors of economic activity, there has been a serious impediment to the development of common law by the courts in the UK."
The Lord Chief Justice noted that practitioners across construction, shipping, insurance and commodities have expressed concern about the lack of case law around standard contracts despite considerable changes in commercial practice over the past 20 years.
While some may have sympathy for Lord Thomas’s view, many more have been shocked by what looks like a U-turn on settled policy, which had previously been pursued for more than 20 years. If a consensual process between sophisticated parties can settle disputes, why run expensive litigation, tie up court time and spend public money, the argument runs. Lawyers on this side of the argument think that Lord Thomas is taking an overly legalistic approach (some go far as to say archaic), which doesn’t take account of commercial realities.
So what are those commercial realities? By looking at the main differences between litigation and arbitration (as well as other forms of alternative dispute resolution), we can examine why many legal professionals feel that Lord Thomas has simply got it wrong.
The number one advantage of ADR for many commercial parties is privacy. Court documents, the fact that parties are involved in litigation, and the judge’s decision are all publicly available - and indeed have to be available to be used as precedents. By contrast, generally speaking, parties are able to keep the fact they are involved in ADR private, even with the relatively formal process of arbitration. An arbitration award is generally confidential to the parties and although it might be a persuasive authority for future disputes, it does not give rise to a binding precedent. The private approach is very attractive to many commercial entities and, of course, goes to the heart of the issue which Lord Thomas raises.
Next is the issue of cost. Mediation and other forms of negotiated settlement are the least expensive options while arbitration can be cheaper than litigation but is not necessarily so. Much will depend on the attitude of the parties and the arbitrator - co-operative parties and an experienced arbitrator can come up with procedures and a schedule, which keep costs to a minimum while aggressively contested arbitrations may not be much (or at all) cheaper than litigation. At the costs recovery stage it is generally the case that losing litigants bear the costs of the other party. When parties enter into mediation, or where an expert determines the dispute, they usually agree to split the costs of the process. Parties are at liberty to reach whatever agreement they wish to in terms of costs as part of the resolution. Again, the more formal arbitration of arbitration looks more like litigation with arbitrators having discretion with what costs orders to make.
Where the dispute between parties is of a particularly technical nature, ADR methods can have an advantage over litigation because the parties can choose an arbitrator with the appropriate expertise to hear the dispute – a judge may or may not have that technical knowledge. Expert adjudicators are particularly useful in construction, engineering and other areas where the material is dense.
ADR, particularly mediation, is a faster and more flexible process than litigation. Whether this is true for arbitration, again, can depend on the attitude of the parties and the arbitrators. But it is true that arbitral tribunals tend to sit for longer each day and may sit at weekends in order to expedite the process.
For many practitioners the biggest difference between litigation and ADR is the consensual nature of arbitration and mediation. This allows parties to manage the dispute themselves in all sorts of ways whereas the formal litigation route brings in hard deadlines, hard costs and, potentially, a hard judge.
In the final analysis, whether parties in dispute litigate or pursue ADR methods will depend on a host of factors including the contractual relationship, whether there is a need to keep on-going relations cordial etc. What is beyond doubt is that commercial parties want certainty – Lord Thomas’s comments have been seen by many as increasing uncertainty in an already uncertain world.
Philip McMullan is a writer and researcher.