UK: To Arbitrate Or Not To Arbitrate?

To paraphrase Shakespeare on the 400th anniversary of his death, we may ask: to arbitrate or not to arbitrate?

That is the question faced by law firms when considering whether or not to include an arbitration clause in their terms of engagement. Historically, law firms have tended not to do so. However, in recent times there has been a discernible shift, with more law firms viewing arbitration as a viable alternative to litigation in resolving disputes with their clients and former clients. So why has there been a shift? Perhaps it is due to the influx of US law firms, which have historically made greater use of arbitration clauses, bringing their business and offices to London; or perhaps it is due to the fact that some clients require the inclusion of arbitration clauses in the terms they agree with their legal advisors, such as many public sector clients. Whatever the reason, arbitration of disputes involving law firms appears to be an increasing trend and we consider in this article some of the pros and cons to be considered by law firms when deciding whether or not to include an arbitration clause in their terms of engagement.

The advantages

One of the most important and valuable assets held by a law firm is its brand and reputation. Therefore, the confidential nature of arbitration may be an attractive option, as it offers the potential of minimising reputational damage. This may equally be seen as a benefit to claimants, who may well have business interests which they would like to keep out of the public eye.

A further clear advantage to arbitration is the ease with which awards may be enforced in foreign jurisdictions. This is particularly important where one or more parties to the arbitration are based abroad. 147 countries (including China) have adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which was adopted in New York on 10 June 1958 and which provides a fast and cheap option for enforcing arbitration awards in member states. There is no equivalent for the enforcement of Court judgments, which can be a slow and costly process. However, where the place that any award is likely to be enforced is not a party to the New York Convention, it will of course be important to examine which (if any) reciprocal treaties it is party to, to ensure that the award may be enforced.

Other advantages of arbitration include: (i) the potential for greater neutrality – so that, in a cross-jurisdictional dispute, neither party is seen as having a "home advantage"; (ii) flexibility – as the parties can agree procedural rules, language, seat, venue, applicable law and so on; and (iii) expertise – as parties can agree to appoint arbitrators which have relevant market experience, or expertise in a particular industry in relation to which the dispute arises.

In light of these advantages, it is not immediately clear why professional liability disputes have not in the past been arbitrated more frequently. From our experience, arbitrations are still relatively few and far between for claims brought against law firms, in contrast to, for example, insurance policy disputes, where arbitration proceedings are commonplace. We think there are a number of reasons for this.

Disadvantages

Firstly, whilst the confidential nature of arbitration may be an attractive option when seeking to minimise reputational damage, as readers of the legal press will be aware, disputes can be "leaked" and reported by enthusiastic reporters, such that law firms may prefer the public vindication offered by the public Court system, in the face of highly-publicised weak or spurious claims.

A further reason why law firms may prefer not to include arbitration clauses in their terms of engagement is that firms are unlikely to want to have to arbitrate over fee disputes, given the higher level of upfront costs associated with engaging an arbitration institution and arbitration tribunal compared to the lower Court fees, and the expertise available in the Senior Courts Costs Office for dealing with such disputes. Further, while many believe that arbitration provides a cheaper option to litigation, in our experience that is often not the case. In the context of Court proceedings, parties are not required to pay for venue hire nor the judge's time, while in arbitration, costs will be incurred both for the venue and the arbitrator. In addition, whilst legal representation is not mandatory in arbitration, most parties do retain legal representation (particularly for complex cases), which means that the costs of preparing for and attending arbitration in complex professional liability disputes are likely to be comparable to the costs of preparing for and attending a trial (though, admittedly, the costs of arbitration can be lower in the context of small or less complex disputes).

In addition, professional liability disputes are often multi-party and law firms may prefer to have access to the powers of the Court system, which allow the joinder of third parties to Court proceedings. It is more difficult to join third parties to arbitration proceedings and there is therefore a greater likelihood of having to bring separate contribution proceedings. In addition, the powers of the Court system may assist to coerce uncooperative parties and, in suitable circumstances, may enable a case to be disposed of summarily. Furthermore, appeals from arbitration are more restricted – though this is a double-edged sword as this also provides the advantage of greater finality. It is also worth bearing in mind that arbitral awards do not have precedent value. In the context of professional liability disputes against law firms, binding legal precedent is often desirable – for example, to guard against firms having to defend the same kinds of claims repeatedly.

Concluding remarks

Arbitration clauses should be considered and utilised in the right circumstances. For example, arbitration will be the dispute resolution process of choice where a judgment may be more difficult to enforce than an award due to the client being located in a foreign state with inadequate reciprocal enforcement arrangements. Arbitration may also be preferred where the parties wish to avoid, for whatever reason, the Court system in the jurisdiction most likely to hear any dispute between them, such as where the judiciary is likely to have a quasi-political agenda or where the parties wish to avoid the uncertainty and lack of privacy of a jury trial. Arbitration will, in such circumstances, offer the option of a closed-door, confidential process over which the parties will have the freedom to choose the composition and location of the tribunal and the rules which would apply. However, where jurisdictional issues do not arise and it is desirable to retain the potential benefits of public vindication, creating a precedent, accessing coercive powers of the Courts, and a more flexible appeals process, then Court proceedings are likely to be more desirable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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