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LCJ: litigation preferable to arbitration in commercial cases

Lord Thomas: reconsider restrictions on judiciali appeal of arbitration

Lord Thomas: laws on arbitration “wrong turning”

The growth of arbitration as a means of resolving commercial disputes has retarded the development of the common law and the balance between the two should be re-examined, according to the Lord Chief Justice.

In the Bailii Lecture, given earlier this month in London, Lord Thomas argued that legislation in 1979, reinforced in 1996, to alter the relationship between the court and arbitration, “went too far… in favouring the perceived advantages for arbitration as a means of dispute resolution in London over the development of the common law”.

The consequence of the move to restrict the role of judges in appeals from arbitrations – made on the assumption that London’s attractiveness was being damaged as a centre for dispute resolution through arbitration – was a “wrong turning” in need of reappraisal, said the judge.

The changes, contained in the 1979 and 1996 Arbitration Acts, were made to create “greater finality and certainty in arbitral awards”. But ironically, by limiting the number of appeals from arbitral awards, London’s popularity as a centre for dispute resolution due to contracts based on the common law was in fact undermined, he argued.

Lord Thomas said he disagreed with the “philosophic point” behind the new regime – that “as the parties had freely chosen arbitration, the court should not interfere”. The result of the changes, he said, had been a big drop in the number of appeals from arbitral awards coming before the courts because of the narrow test for the grant of permission to appeal adopted in place of the previous, broader, ‘special cases’ arrangements.

Lord Thomas continued: “In my view, therefore, we must address what has happened and restore an essential part of the way in which courts are able to continue the development of the law that underpins our trade, financial system and our prosperity.”

He said there were a number of possible options. One was a revision of the criteria for appeals: “[To] go back to a more flexible test for permission to appeal… that would enable the courts more readily to develop the law whilst leaving arbitration as an important means of dispute resolution.”

This option had the merit of overturning the restriction on appeals, which he called “a serious impediment to the growth of the common law”, adding: “It would increase the potential for greater numbers of appeals which would provide the means to maintain a healthy diet of appellate decisions, capable of developing the law particularly on issues of general pubic importance.”

Another option was to encourage the use of section 45 of the 1996 Act, which would “enable the court to give decisions on points of law which arise after the commencement of an arbitration but before the decision”. But he acknowledged it carried the risk of “the spectre of reintroducing what was perceived to damage London’s attractiveness as a centre for arbitration”.

The third option was a general shift towards litigation instead of arbitration. The perceived advantages of arbitration over litigation – “such as party autonomy, confidentiality, enforcement, speed and low cost” – were often either unclear or failed to withstand scrutiny, he argued. “Whether to litigate, arbitrate, or for that matter mediate, a dispute will rest on many factors. What is good for one dispute may not be for another.”

He concluded: “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.”

He ended by underlining: “It is the courts that develop the law. Arbitration does not. Courts articulate and explain rights, including definitive rulings on the scope and interpretation of contractual clauses, financial instruments and so on. Arbitration does not.

“As has been very rightly noted, ‘open court proceedings enable people to watch, debate, develop, contest, and materialise the exercise of both public and private power’. Arbitration does not.”