When opportunity knocks: will arbitration become the preferred means for resolving offshore commercial disputes?

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2020-07-27

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This article was originally published in IFC Review, June 2020.

The optimists among us look for “silver-linings” in these challenging times. One of these is affirmation of our capacity for innovation and adaptation as individuals and businesses, and our societies have adjusted, and innovated in response to the dramatic restrictions imposed on our way of life.

However, adaptation is not possible without the flexibility to achieve it. And flexibility is the hallmark of dispute resolution through arbitration. By contrast, courts are innately conservative and inflexible, with byzantine procedural rules and outdated traditions. 

With the leading offshore financial centres (OFCs) promoting themselves as international arbitration centres, the COVID-19 pandemic provided an opportunity to showcase the advantages of arbitration as a form of dispute resolution.

The response of offshore courts to the pandemic varied between the various jurisdictions but in all cases were effectively shut down for several weeks, in some cases months, with only the most urgent applications being accommodated. Consistent with the traditional hierarchy, local bars were kept up-to-date with directives telling them what could and could not be done. In the meantime, cases of great importance and urgency (at least in the eyes of the beholder) simply ground to a halt: justice delayed and denied.

By contrast, arbitration proceeding continued to be progressed with the participants simply doing what they have always done: eschewing restrictive procedural rules and customs, taking ownership of the process, and devising bespoke procedures suitable to the particular dispute and to the prevailing circumstances. While the concept of a remote evidential hearing by video-link proved a bridge too far for most arbitration participants, within days of lockdown strategies were being explored to enable that particular bridge to be taken, if necessary, with the assistance of new technology.

While my court practice was paused from mid-March, my arbitration practice – as both counsel and as a sitting arbitrator – did not skip a beat. International arbitrations have been effectively paperless for years (by necessity, given the diverse locations of participants), and most communications, including applications and tribunal orders, are conducted via email. The practice of having a final, in person evidential hearing remains for the most part, but status conferences, skirmishes over procedural matters, and the determination of preliminary legal issues are almost always resolved via emails, “on the papers” or, in some cases, by a telephone or video hearing.

Less paperwork, more efficiency

In the courts, a simple contested application (e.g. for more time to meet a procedural deadline) may require the issue of a hard copy summons which is taken to the court registry in draft where a fee is paid before the summons is issued, stamped, and returned to the applicant who will then serve the respondent in hard copy. The application may be supported or opposed by an affidavit which is witnessed (in person) by a third party before being filed, stamped, and served, again all in hard copy. Counsel may also file (in hard copy of course) formal written submissions articulating their clients’ respective positions, perhaps along with a file of case authorities. On the appointed day (which can be several weeks after the summons is issued), counsel will attend court, wait their turn in the list (at their clients’ expense) before appearing before a judge. An order reflecting the judge’s ruling will then have to be drawn up by the parties which, again, is filed, sealed, and served in hard copy. All of these documents will be maintained by the court on its hard copy file.

By contrast, the same type of application in a commercial arbitration may involve just one or two emails from each party to the arbitral tribunal setting out the parties’ positions and attaching pdfs of relevant documents or authorities. Thereafter, often within a few hours, the application will be determined by the arbitrators (who may confer by email or telephone conference) and a decision is rendered by email. In rare cases, a telephone or video hearing may be convened to hear the parties on the issue. This approach is not only much less costly and much quicker, but it also has almost no environmental impact and poses no health-related risks.

Given their adherence to court procedures (largely designed for a time before the advent of information technology), and the reliance on paper files, it is unsurprising that OFCs’ courts were incapacitated by the pandemic. However, there are other factors that I suggest contributed to the slow response of the courts.

In commercial arbitration, arbitrators are employed and paid by the parties. If the arbitration stops, so does their income. If the parties decide between them to proceed in a particular way, they will instruct the tribunal to facilitate it (albeit the instruction is usually framed as a proposal out of politeness). Regrettably, the governments of OFCs have failed to provide adequate funding for their court systems, focusing expenditure on generating new business for the jurisdiction at the expense of the courts who are viewed as “back office”. This lack of funding has impeded the development of modern, electronic document management systems, much needed procedural reform, and has adversely affected the morale of judges and court staff who were already dealing with an excessive caseload before the pandemic.

In contrast to onshore jurisdictions, where domestic disputes dominate, most commercial disputes before the courts of OFCs are multinational in the sense that one or more parties is located outside the jurisdiction and, typically, most, or all, of the principals and witnesses reside overseas. In a majority of such cases, foreign lawyers are involved in some way. Over the years, OFCs have seen a steady flow of visits by overseas lawyers, including London Queen’s Counsel, admitted on a case-by-case basis to appear in offshore courts. Often, judges who sit in the appellate courts of OFCs do not reside in the jurisdiction and will fly in three or more times a year for appellate sittings.

Prior to the pandemic, the availability of regular air connections, and the willingness of litigation participants to travel to these pleasant island jurisdictions, left many of the geographical limitations of court-based litigation unexposed.

It would be going too far to say that that all arbitrations were unaffected by the pandemic. However, the impact was relatively minor and the conditions conducive to finding bespoke solutions were much more favourable with the parties and the arbitrators sharing a common interest in keeping the process moving.

Opportunities for arbitration

So what opportunities lie ahead for expanding the use of arbitration for resolving offshore commercial disputes?

Not all commercial disputes are suitable for resolution by arbitration (those in the insolvency arena, for example) but most are. In Bermuda’s insurance and reinsurance market, arbitration clauses are standard in the thousands of policies that are issued each year. It is also increasingly common for arbitration clauses to be inserted into contracts with offshore service providers, executive employee contracts, and asset and share sale agreements. For the most part, offshore trusts disputes are not considered arbitrable (due to complications arising from the interests of minor or unascertained beneficiaries), but the impediments can be overcome through appropriate legislation, as has been attempted in recent legislation enacted in the Bahamas.

Many in the OFCs will be concerned about the threat to local economies posed by the growth of international arbitration, which enables the dispute resolution process to be exported and facilitates participation by lawyers based in other jurisdictions. This is a legitimate economic concern, but in a world where commercial parties have much enhanced freedom to choose where and how they resolve their disputes, protectionist policies will achieve little and may only serve to drive away international business.

A better approach, it is suggested, is for OFCs to embrace arbitration and to position themselves as international arbitration centres. This might include promoting the resolution by arbitration of disputes that are wholly unconnected with the jurisdiction, as is the case with leading international arbitration centres such as London, Singapore, Paris, and Stockholm.

Of course, the OFCs will always need functioning commercial courts and high-quality commercial judges, not least to provide support to the arbitration process. Governments must recognise the valuable – and very visible – role that OFCs’ courts perform in maintaining the good reputation of the jurisdiction and thereby attracting inward investment. The pandemic has exposed shortcomings and the court services must be provided with the funding they require to operate to modern, international standards and to be able to continue to carry out their vital function. 

Read other items in Commercial Brief - September 2020