Business as usual?

Sophie Nappert analyses how international arbitration in London will fare post-Brexit

Unless and until the UK formally leaves the EU, the Brexit vote – which has political and historical significance, but is not legally binding on government (the European Union Referendum Act 2015 is silent on the issue) – will have little impact on London’s status as a centre for international arbitration.

The withdrawal process itself is contemplated by Art 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’.

Constitutional law experts have advised that, for the EU referendum result to be given effect, an Act of the UK Parliament is required to allow Art 50 to be triggered and the UK formally to leave the EU (see ‘The Article 50 “trigger”’, Nick Barber, Tom Hickman and Jeff Kind, Counsel, August 2016). This entails a Bill being presented for debate before Parliament, and approved in the same form by both the House of Commons and the House of Lords.

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

Immediate impact on London

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 (AA 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. (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 illustrate the important challenges facing international arbitration in this context (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)).

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.

The prospect of a dismembered Britain (no longer the UK) out of the EU is arguably more threatening to international arbitration in London than 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.

Rebalancing courts and 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 AA 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’, 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”’.

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’s speech have roundly condemned his views as out of step with commercial reality. Commentators, including former Supreme Court Justice Lord Saville, have pointed out that international disputing parties should not ‘be obliged to finance the development of English commercial law’ and called Lord Thomas’ arbitration proposals ‘wholly retrograde’.

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

The commercial worth of arbitration

Given the likely long lead in time to an exit that is not a foregone conclusion, and in light of ‘the not inconsiderable, and measurable, economic benefit that befalls arbitration-friendly jurisdictions’, estimated in 2009 at some €4bn for the EU by the European 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 p 35), 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 – 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.

Contributor Sophie Nappert is an arbitrator in independent practice at 3 Verulam Buildings

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Sophie Nappert

Sophie Nappert is a dual-qualified lawyer in Canada and in the UK. She is an arbitrator specialising in international disputes, notably in energy, infrastructure, natural resources and cross-border investment.