In-house counsel seek a Brexit-proof solution: are we entering the ‘age of arbitration’?

Written on 24 Nov 2020

Given the wide-scale disruption wrought by the Covid-19 pandemic, disputes are likely to increase in the coming months. The forum in which those disputes are determined can have a significant impact on the eventual outcome – and with Brexit creating uncertainty, now could be the time to look again at arbitration.

The decision and debate over whether to have an arbitration or High Court clause in a contract dealing with a cross-border deal is one well-known to in-house counsel. But as Brexit once again takes centre stage – adding to the risks relating to Covid-19 and transformation across all industries – that debate needs to be revisited anew.

While the legal framework for international arbitration is unaffected by Brexit, the same, as we explain below, cannot be said for proceedings in the courts. Reforms in arbitral rules have also created the opportunity for genuinely expedited proceedings that many in-house counsel have long craved. These changes lead to an intriguing question: do we have the conditions required for a new 'age of arbitration' in England and Wales?

Brexit and the courts

We should be clear about one point from the start. Nobody is arguing that the English High Court is anything other than well-placed to handle large-scale international disputes. England and Wales is a popular choice of jurisdiction in international commercial contracts for a range of reasons, including the reliability and quality of the English judicial system and its judges and its perceived neutrality and familiarity with complex, high value disputes.

However, Brexit and its consequences might lead more parties to opt for international arbitration instead of litigation as the method of choice for final determination.

That is because there is, for now at least, some uncertainty as to how courts of EU Member States will deal with issues of jurisdiction and enforcement after the end of the transition period. The EU recast Brussels Regulation (1215/2012) provides a straightforward regime for jurisdiction clauses to be recognised and judgments recognised and enforced in other EU Member States. But that regulation will cease to apply in the UK after the end of the transition period. As an alternative, the UK government intends to sign up to the Hague Convention on Choice of Court Agreements 2005 as soon as the transition period ends. But that is far from a complete solution. Some important points remain uncertain or unsatisfactory, for example:

  • The Hague Convention does provide that an exclusive jurisdiction clause will be recognised by the courts of one of the signatories and a judgment obtained from the court nominated in the clause to be recognised and enforced. The Hague Convention currently applies between EU member states (including the UK) and other contracting states. It is anticipated that the Hague regime will apply as between the UK and EU Member States once the UK signs up in its own right at the end of the transition period.
  • However, the European Commission recently released a Notice to Stakeholders which maintains the view that English jurisdiction clauses entered into before the end of the transition period (31 December 2020) will not fall within the scope of the Hague Convention. As such, jurisdiction (and consequently enforcement of judgments), together with service of claim forms and the taking of evidence, will fall to be considered under the national laws of the EU27 countries.
  • In some limited circumstances, that might mean that an EU country might decline to stay proceedings started in that jurisdiction, even if proceedings have been started in England in accordance with an English jurisdiction clause. This could be on the basis that, in the opinion of the court of that EU country, there is no valid English jurisdiction clause in the contract. That raises the risk of irreconcilable judgments. It might also take longer, and cost more, than at present to enforce an English judgment in an EU country, although where an English judgment is based on an English jurisdiction clause entered into after the end of the transition period, the process should be fairly close to that under the recast Brussels Regulation.

A Brexit-proof alternative?

As noted above, the international arbitration framework is unaffected by Brexit: it does not rely on EU law. This is why arbitration clauses have been described as 'Brexit-proof'.

Arbitration has long been used in a wide variety of sectors to settle disputes and is a cross-border dispute mechanism of choice. There are a number of features that underpin its popularity. We could speak of confidentiality, neutrality, the ability to nominate an arbitrator and general procedural flexibility.  Here, however, we highlight just two of the attractive features that have benefitted parties in all types of sectors.

The need for speed

The time it takes to reach a final resolution of a dispute is crucial and it is often said that "justice delayed is justice denied". The ability of the parties to design their own procedural steps, free from the constraints of court rules and appropriate for the particular issues in dispute, is one of the main advantages of arbitration.

For years, parties said that they wanted swifter proceedings. Arbitration adapted. Several institutions have introduced expedited arbitrations to ensure the process can be accelerated. For example, under the ICC rules, a streamlined procedure (with a reduced scale of fees) is available, on an opt-out basis, for disputes not exceeding US$ 3million. The parties can choose to opt into the procedure for disputes above that level too. Our experience of these proceedings is that the net result is a procedure to final award lasting roughly eight months, with much reduced legal spend. It is proving a popular choice.

In the vast majority of arbitrations there is no right of appeal (that will certainly be the case for ICC, LCIA and other institutional proceedings). An award can in principle be 'challenged' (and potentially 'set aside') on certain narrow grounds, mostly relating to procedural impropriety, but this is something that will only happen in a low percentage of cases and is not an opportunity to 're-open' the case.

Enforceability

As noted above, the framework for 'recognition and enforcement' of court judgments remains uncertain in the context of Brexit. By contrast, the centreal instrument for recognition and enforcement of international arbitration awards remains unaffected. The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, has been adopted by over 160 countries (the UK included) and its unparalleled reciprocal arrangements, the cornerstone of enforcement actions over the years, continue to be one of arbitration's greatest attractions.

So, are we entering the age of arbitration?

With increased arbitral caseloads in many jurisdictions worldwide, there are some arbitration practitioners who will tell you an age of arbitration has already begun. However, even if conditions are favourable currently to arbitration, do not bet against the English courts also remaining a highly popular choice for cross-border litigation, whatever Brexit headwinds there may be. Medium to long term the current issues should dissipate and the English courts, if nothing else, have always shown themselves to be highly adaptable.

The message for in-house counsel, can be simply stated. The legal framework for our domestic courts is undeniably changing around us due to Brexit. As a result, for those who favour this jurisdiction for their disputes, this is the right time to ask anew the question "arbitration or court proceedings?" when finalising contracts. You have options: just following the precedent is not enough. And for those tempted to change, well, an international arbitration with a London seat is hardly an exotic beast. The ability to retain many of the advantages and features of English law and practice that attract you, together with private and confidential proceedings, can lure in even the most change-adverse.