Litigation v Arbitration – Speech

May  2016 / 11 No Comments

BAGOL Flyer 2016, Litigation v Arbitration speech

Litigation v Arbitration

“The one great principle of the English law is to make business for itself”

Charles Dickens in Bleak House

“Going to court is just an expensive habit”

Keith Richards of the Rolling Stones

1. It’s a great pleasure and privilege to address the British American Group of Lawyer’s Conference.

2. Professor Dame Hazell Genn said in the Hamlyn Lectures (2008) that civil justice has been downgraded in recent years.  She said, “it is hard not to draw the conclusion that the main thrust of civil justice reform is about neither access nor justice.”  Her view was that it was simply about diversion of disputants away from the courts and about less law and the downgrading of civil justice. 

3. Other commentators, Robert Dingwall and Emilie Cloatre, in 2006 said in their article Vanishing Trials: An English Perspective “successive UK governments have decided that although civil justice may be a public service, it is not a public good.  They see the system as providing only private benefits for individual rather than collective benefits for society as a whole.”  In his view the creation of precedents and the creation of law through the civil justice system was not perceived by Government as contributing to the general welfare as the State provides education or healthcare. 

4. I do not agree with either of these sentiments. 

5. Arbitration made its first statutory appearance in England in the late 17th Century.  The Arbitration Act of 1996 has a long provenance.  Arbitration has a great deal in common with the formal judicial process.  It generally involves a formal, private process and the determination of a dispute by a neutral tribunal chosen by the parties for its expertise in respect of the issue in dispute.  It does not sit outside the formal justice system.  It is a fundamental part of it. 

6. Lord Neuberger, the Master of the Rolls in the fourth Keating Lecture in 2010 rightly emphasised that the three dimensions of justice, equity and law, arbitration and alternative dispute resolution all have a part to play in the civil justice system. 

7. In that lecture the Master of the Rolls noted that a fair process should seek to produce a substantively just decision.  In my view the absence of a fairness paradigm in English law is a deterrent to litigants in dispute resolution by the courts.  Law and justice do not necessarily equate.  Courts seek to do right according to the law, but on occasions reach decisions which result in unfair consequences.  This is an intrinsic problem, especially in the Chancery Division.   The Judicial Oath requires a Judge to, “do right to all manner of people after the laws and usages of this Realm, without fear or favour, affection or ill will.”  To do justice includes reaching a decision which results not only from the application of laws and usages of the Realm, but which is in all the circumstances a just and fair decision on its merits. 

8. Arbitration emerged as a response to the shortcomings of the civil justice system.  For a period of time, it was seen as litigation’s poor cousin.  But that is no longer the case.  We are now in the golden age of arbitration.  Arbitration plays an essential role in the global infrastructure of transnational trade and commerce, and thus in the development in the international rule of law. 

9. The past two decades have seen the establishment of new arbitral institutions all over the world in a trend which reflects the global trade flows.  Such institutions have been established in Asia, the Middle East and Africa.  The number of international arbitration cases has grown worldwide.

10. Along with the increase in the number of arbitration cases has come the establishment of transnational practices to deal with disputes of jurisdictional complexity.  There has been a major growth in the number of entrants to the global arbitration community, many from diverse legal traditions.  There is an increasing use of third party funding and the participation of funds in international arbitration. 

11. In many instances now the business community, both domestic and global, see arbitration as a better method of resolving commercial disputes.  The reasons for this are manifest.  They relate to its confidentiality, flexibility, neutrality, choice of tribunal, enforcement, finality, cost, expedition, and disclosure.  I will now expand on these matters by way of comparative evaluation. 

12. It is easy to understand why the global business community see arbitration as the preferred method of resolving cross-border disputes:

a. The parties are much more likely to achieve a confidential and private dispute resolution process in arbitration than in other methods including litigation which is generally in public. 

b. Arbitration, for the most part, has more flexibility than litigation, allowing the parties to craft their own dispute resolution process if they so choose. 

c. Arbitration is aimed at providing a neutral forum for resolving disputes, independent of the parties or national courts, although problems may arise in terms of a conflict of interest where advocates and arbitrators come from the same pool of expertise as Counsel. 

d. In arbitration the parties can select their own tribunal.  This may be a great benefit.  As the American attorney, Roy Cohn said, “I don’t want to know what the law is, I want to know who the judge is” (New York Times Book Review, 3 April 1988). 

e. International arbitral awards benefit from the New York Convention, making them generally more easily enforceable worldwide than court judgments in the 150 countries subject to the Convention. 

f. Arbitral awards, unlike decisions of national courts are not in most developed jurisdictions subject to review on the facts or on the law, though they are generally reviewable on a narrow range of issues such as jurisdiction, procedural fairness and public policy. 

g. Arbitration has generally been considered a cheaper option than litigation in national courts. This is not necessarily always the case, but in most civil law jurisdictions it remains so. 

h. Arbitration is generally a faster method of resolving disputes compared with litigation, which in some jurisdictions like India, Africa and the Caribbean can take decades.  In 2009 Indian courts had a backlog of 30 million unresolved cases.  Even in more developed jurisdictions, instances of lengthy proceedings are often cited.  In the famous BCCI case the opening submissions of the Claimant took 80 days to delivered, and those for the Defendant 119 days. 

i. Document disclosure is again usually a more limited process than in court litigation, but there are also exceptions to this.  The scope of documents to which a party is entitled under the US Federal Rules of Civil Procedure is wider than that under most common law and almost all civil law countries.  There is generally no, or only a very restricted obligation on the parties in civil law countries to “provide any disclosure” or “discovery” of documents other than those on which they intend to rely.  Court rules on disclosure do not apply to international rules of arbitration. Attitudes of tribunals to disclosure issues can vary greatly, making this one of the most debated areas in arbitration. The parties and tribunals often adopt the “Rules for the Taking of Evidence in International and Commercial Arbitration” produced by the International Bar Association (the IBA Rules) which are widely considered to be an international standard for document production in arbitration.

13. The arbitration process has in the recent past become the subject of criticism both in the US and in UK.

14. Later I will deal with the United States Supreme Court Decision in American Express v Italian Colors Restaurant 1335 Ch 2304 (2013), but first let me set the scene.  In the US, in response to a period of hostility by the Federal Courts towards private arbitration, Congress passed the Federal Arbitration Act (FAA) in 1925 providing that written arbitration agreements, “shall be valid, irrevocable and enforceable, save upon such grounds as exist in law or equity for the revocation of any contract.” Corporations and businesses in the US did not initially use arbitration agreements to require employees, insurers, franchisees or other parties typically understood to stand in weaker bargaining positions to resolve disputes through private arbitration.  The legislative history of the FAA indicates that the Bill’s supporters probably did not intend for it to cover such agreements, but rather to cover negotiated agreements between businessmen.  The early Supreme Court’s decision on this issue likewise indicated that the Court would not apply arbitration clauses in contracts of adhesion against consumers and employees: in other words, where parties to a given contract were differently and unequally situated vis a vie bargaining power.

15. In addition, the Court expressed a reluctance about applying arbitration agreements when federal statutory rights were at issue.  In Wilko v Swann 346 US 427, 437-438 (1953) the Supreme Court held that claims under the Securities Act 1933 were not subject to arbitration, finding that “in so far as the award in arbitration may be affected by legal requirements, statutes or common law rather than by considerations of fairness, the provisions of the Securities Act control.”  However, the Court changed its position in the 1980s when it stated that the FAA amounted to a “liberal federal policy favouring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” Moses H Cone Memorial Hosp v Mercury Construction Group Company 460 US 1, 24 (1983).

16. Since then the Supreme Court has further expanded the FAA holding that all federal statutory claims are arbitrable unless Congress has expressly provided to the contrary, which it has done only in the rarest of circumstances.  The approach taken was that arbitration served only as an alternative mechanism for dispute resolution and the freedom to craft arbitration contracts was simply a freedom to streamline adjudicative mechanisms.  This allowed the Supreme Court to justify arbitration and Federal statutory claims as fully consistent with the enforcement of federal law. As the Court put it repeatedly, arbitration is a matter of a contract and the Courts must therefore give effect to the parties’ intent.

17. But it was subject to the proviso that if parties used arbitration as a way to effectuate a, “prospective waiver of federal statutory rights” then the Court would have little hesitation in condemning the agreement as against public policy (Mitsubishi Motor Corp v Soler Chrysler – Plymouth Inc 473 US 614, 633 1985).

18. However a tension developed between freedom of contract and efficient claim facilitating procedures.  This reached what some have described as a breaking point in the Supreme Court case of American Express v Italian Colors Restaurants.  This case arose because the owner of a small restaurant thought that American Express had used merchants to use its monopoly powers to accept a formal contract violating the anti-trust laws.  The restaurateur wanted to challenge a variety of procedural bars that would make pursuit of the anti-trust claim a fool’s errand.  The agreement between American Express and the cardholders required all of their disputes to be resolved by arbitration and provided that, “there shall be no right or authority for any claims to be arbitrated on a class basis.”  The Respondents nonetheless filed a class action claiming that American Express had violated the Sherman Act. They claimed that the cost of expert analysis necessary to prove the anti-trust claims would greatly exceed the maximum recovery for an individual Plaintiff.  The Supreme Court held that the FAA did not permit courts to invalidate a contractual waiver of class arbitration on the ground that the Plaintiff’s cost of individually arbitrating a Federal statutory claim exceeded the potential recovery. 

19. The Court said that the overarching principle is that arbitration is a matter of contract.  It was for the courts to, “rigorously enforce” arbitration agreements according to their terms even for claims alleging a violation of a Federal statute unless the FAA’s mandate has been overridden by a contrary Congressional command.  It further held that no contrary Congressional command requires rejection of the class arbitration waiver.  The anti-trust laws do not guarantee an affordable path to the vindication of every claim or, “evince and intention to preclude a waiver” of class action procedure. The Court acknowledged the proviso to which I have earlier referred in the Mitsubishi case of the desire to prevent “prospective waiver of parties rights to pursue statutory remedies” but held that the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.  It would cover, the Court said, a provision in an arbitration agreement forbidding the assertion of certain statutory rights and it would perhaps cover filing administrative fees attached to arbitration that are so high that it would make access to the forum impracticable.  But the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy in the majority’s view. The class action waiver merely limits arbitration to the two contracting parties.  It no more eliminates those parties’ rights to pursue their statutory remedy than did Federal law before its adoption of the class action for legal relief in 1938. 

20. In his dissenting Judgment Justice Kagan described the Court’s reasoning as “too darn bad.”  He said it was a, “betrayal of our precedents and of Federal Statutes like the Anti-Trust laws.”  He said our decisions have developed a mechanism called the effective vindication rule to prevent arbitration clauses from choking off a Plaintiff’s ability to enforce congressionally created rights.  That doctrine bars applying such a clause when (but only when) it operates to confer immunity from potentially meritorious federal claims.  In so doing the rule reconciles the FAA with all the rest of Federal law and indeed promotes the most fundamental purposes of the FAA.  As applied here the rule would ensure that an American Express arbitration clause does not foreclose American Colors from vindicating its right to redress anti-trust harm.  The principle applicable was that, “an arbitration clause may not thwart Federal law irrespective of how it does so.” 

21. There has been criticism of the majority decision.  Professor Maria Glove of Georgetown University of Law, writing in the Yale Law Journal (Volume 124 page 3052 (2015)) saw the decision as evidencing:

a. the shift from arbitration as a form of streamlined proceedings for dispute resolution to solely a matter of contract

b. the Supreme Court’s rejection of the “Effective Vindication of the Rights Principle”

c. the erosion of substantive law. 

She said (at page 3072) “In Italian Colors the Court subtly but definitely abandoned its descriptive and normative premise that freedom of contract was justified in the arbitration context because it would result in more cost-effective procedures for “settling disputes” and accordingly effective enforcement of the Federal Statutory regime.   In its place the Court adopted a reductionist vision of arbitration as any set of private dispute resolution procedures chosen by parties, no matter how onerous or inefficient and it held that the FAA required Courts to enforce whatever terms the parties chose.  The Courts decision, therefore, marked the end of arbitration as we know it. Its jurisprudence had fully evolved from one that eroded the public realm to one that eroded the substantive law.” 

22. With great respect to the Professor, this is a significant overreaction to and misconceived interpretation of the Italian Colors case.  I do not read into what was essentially a decision on its own facts any abrogation of fundamental principles which govern the relationship between the courts and arbitration.  On the contrary, Italian Colors is a reaffirmation of the fundamental principles of freedom of contract.  What the parties agreed to be bound by is binding unless it is contrary to the applicable principles of law and statute which would make it inapplicable.  In this context, that is the meaning of the Rule of Law and it is this principle which the majority of the Supreme Court upheld.  I do not accept that American corporations now have the power through contract to negate substantive law (page 3075).  The Professor’s view that the majority Judgment in Italian Colors means that, “those entities can substantially alter if not avoid “their legal obligations” under any substantive legal regime is farfetched and scaremongering.  It does no such thing. 

23. Having criticised a University of Georgetown Professor, I now turn to the recent lecture given by our present Lord Chief Justice, Lord Thomas, in the Bailii Lecture on 9 March 2016.  Lord Thomas suggests that, “as arbitration clauses are widespread in some sectors of economic activity, there has been a serious impediment to the development of the common law by the courts in the UK, particularly through the Commercial Court” (a term he also uses to encompass the Technology and Construction Court and the specialist Courts of the Chancery Division).  The Lord Chief drew a distinction between the attractiveness of London as a centre of dispute resolution, whether through the courts or arbitration and the much more important issue – the development of the law that underpins trade, commerce and industry.

24. Characterising the development of the law by the courts in London as a much more important issue than, “dispute resolution whether through the courts or arbitration” is a controversial statement from the head of this country’s judiciary.  With respect, I would have thought the achievement of both objectives was of equal importance.  If the courts / judges regard the development of the law as more important that the resolution of the dispute between the parties then it is not surprising that parties over the last three decades have increasingly turned to arbitration as a preferred method of resolving disputes in commercial matters.  Furthermore, what the Chief Justice said is at odds with my professional experience that commercial judges are rightly more concerned in deciding disputes on the facts rather than in the development of the substantive law.  Hard cases make bad law. 

25. Historically too, Lord Woolf’s reasoning and that of Lord Justice Jackson have been to recognise that alternative dispute resolution is to be encouraged.  When I first came to the Bar, the concern of the courts was that they had too much work. The irony now is that it appears the Chief Justice is saying there are not enough cases to develop principles of law.  Law is an emanation of the State.  It has been argued rightly (see Lord Neuberger in 2010) that it is more than a public or private service, but a public good.  Dispute resolution is an essential part of Lord Neuberger’s three dimensions of justice.  I do not see any incompatibility with commercial disputes being resolved by arbitration against a backcloth of common law established by the Courts.  If commercial parties to a transaction want their disputes settled by arbitration, that is a matter for them.  The Courts should not complain that they are losing work and this is somehow inhibiting the development of the common law.  The Courts have had enough time to develop the common law and still do so with plenty of opportunity to further refine further the principles of common law which have been there for centuries. 

26. Lord Thomas does not point to any specific matters relating to the common law which need further development.  If there are these lacunae in the commercial law, then Parliament is there to ensure these are filled.  To put the burden on private dispute resolution though the courts is an unfair burden on the private sector.  If the courts are there to provide for the public good then that should be funded by the State and not the parties to the dispute. 

27. I attended a dinner at the Manison House on 4 May when Lord Woolf was the guest speaker at the Worshipful Company of Arbitrator’s Charter Banquet.  He made it clear that he did not agree with Lord Thomas’ remarks and felt the courts retained a sufficient workload to develop the common law in commercial matters.  It is also to be noted that Lord Saville (a former Law Lord and Supreme Court Judge) who now sits as an arbitrator wrote in The Times a few days ago on 28 April 2016 saying that he also disagreed with the Lord Chief Justice.  Specifically dealing with a possible reform of the 1996 Arbitration Act to enable more appeals to be brought before the courts he said, “trading and commercial concerns use international arbitration because they prefer this method of dispute resolution to going to the national courts.  They have agreed to accept the decision of their chosen arbitral tribunal.  Thus to allow the court, save in the most extreme cases, to substitute its decision on the merits for that of the tribunal chosen by the parties, in effect rides roughshod over the bargain the parties have made.”  He continued, “people use arbitration to resolve their disputes, not to add to the body of English commercial law.  Why should international parties be put to the expense and delay occasioned by appeals to the court, often followed by further appeals to the Court of Appeal and the Supreme Court?  Why, in other words, should they be obliged to finance the development of English commercial law?” 

28. Perhaps what we see in Lord Thomas’ lecture is a Judge centred analysis.  If you ask a Judge what is at the centre of a civil justice system, not surprisingly the answer is going to be the courts.  But is that the reality?  There is a need to have a broader view of a civil justice system as was pointed out by Lord Neuberger in his exposition of the three dimensions of justice (equity and law, arbitration, ADR).  All three have an essential and interlocking part to play. 

29. There is a need to be careful about assuming that civil justice is achieved by only what happens in courts and trials, rather than in the process of arbitration or alternative dispute resolution.  The Courts are an obviously significant part of the iceberg that is visible while the process of bargaining and negotiation continue below the waterline (see Vanishing Trials: An English Perspective,  Robert Dingwall Emilie Cloatre, Journal of Dispute Resolution, Volume 2006, Article 7 at page 64).  What is below the surface but not superficially visible like the iceberg or the foundations of a building may have as much to do with the stability of the structure as a whole. That is true, I believe of the system of civil justice in the US and the UK.

30. The three component parts of the civil justice system are not a holy trinity and can be improved –but this should not take place at the expense of each other.   Recent changes such as the introduction of the Financial List in the Commercial Court to deal with disputes for more than £50 million are to be welcomed.  They are designed to make the courts more attractive to litigants.  But allowing more appeals from arbitral awards to the courts for the purpose of the development of the common law will be a retrograde step in the administration of civil justice.  The rationale of arbitration was to reduce litigation, not to increase it.  This was one of the reasons for arbitration in the first place.  All three of the dimensions of justice have an equal part to play in the resolution of commercial disputes.  The administration of justice is not just a public good but a private sector service to the commercial community.  The achievement of both these objectives should be respected and enhanced in the development of any reforms to the existing system.

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