Businesses prefer to use arbitration over litigation for cross border disputes
35% reported a rise in the number of international disputes following the financial crisis in 2008
Over two thirds (69%) of in-house counsel in financial services companies felt international arbitration is suited to resolving their transnational disputes
57% of disputes were settled through direct negotiation or mediation. Of those not settled, only 32% were referred to litigation or arbitration
Knowledge and experience of firms/lawyers are the two most influential factors in selecting outside counsel in contentious proceedings
Many corporations are concerned over costs and delays in arbitration proceedings, but international arbitration is the preferred way of settling them.
The 2013 Survey, 'Corporate choices in International Arbitration', investigates how corporations use international arbitration, with a particular emphasis on companies in three sectors of strategic importance to the world economy – Energy, Construction and Financial Services.
Focusing exclusively on the views of in-house counsel, it provides new insights on how arbitration can continue to meet the changing needs of global businesses. We hope this survey helps to inform debate and support the evolution of international arbitration to meet the needs of corporate users in their complex and transnational activities.
Our research team, led by Remy Gerbay, the PwC Research Fellow at the School of International Arbitration, Queen Mary, University of London and supervised by Prof Loukas Mistelis surveyed over 100 corporate counsel, as an important segment of the users of international arbitration, on their experiences and views. Their perspective of what works well and of things that need improving should be valuable to both fellow in-house counsel and to arbitration practitioners.
We found that major corporations, across different industry sectors, continue to affirm the benefits of arbitration to resolve transnational disputes. Corporations are becoming more sophisticated in procuring international arbitration services. Concerns over costs and delays in proceedings persist and in-house counsel are increasingly focused on getting value from the arbitration process.
The survey shows corporations are investing in in-house resources and demanding a variety of alternative fee arrangements to share both the workload and the risks of proceedings more with external law firms. The evidence of arbitration becoming more embedded in corporations should be seen as positive indicators for the future of arbitration from a demanding segment of the market.
For an overview of the key findings and highlights from our study, take a look at the sections below or click here.
Businesses continue to show a preference for using arbitration over litigation for transnational disputes, although concerns remain about the costs of arbitration.
Arbitration is more popular in the Energy and Construction sectors, than in Financial Services. While most Financial Services sector organisations prefer litigation to arbitration, the benefits of arbitration are increasingly recognised; most corporations in this industry agree, in principle, that arbitration is “well suited” to the resolution of disputes.
Half of the respondents to our survey reported that the 2008 financial crisis did not result in a noticeable increase in international disputes for their organisations, although Financial Services sector companies, unsurprisingly, reported an increase in disputes after 2008.
The overall picture is in contrast to the statistics of the major arbitral institutions pre- and post-crisis, which show a clear increase in case referrals (especially from 2007 to 2009, though with a relative decline thereafter).
This may reflect the scope of operations of organisations that participated in the survey: several respondents whose activities were mostly in higher growth regions (such as Africa or Asia and Latin America) reported that the crisis had had a minimal impact on their operations.
With the continuing threat of a eurozone debt crisis, there is uncertainty over the extent to which the current financial and economic conditions may result in more international disputes. Respondents predicting no increase in disputes in the months ahead outnumber those predicting an increase in disputes by two to one.
On average, respondents said that they managed to settle 57% of their disputes through direct negotiation or mediation. Interestingly, of those disputes that do not settle, only a minority (32%) are referred to litigation or arbitration.
In deciding whether to commence arbitration, the most important factors are the strength of an organisation’s legal position, followed by the strength of the available evidence and thirdly, the amount of recoverable damages. While the costs of arbitration are a repeated concern, the prospect of high legal fees was not cited as an important factor in deciding whether to commence arbitration.
Although senior executives and officers often have the final say on whether to initiate arbitration or litigation proceedings, in-house counsel have most influence over the selection of outside lawyers.
The two most influential factors in selecting outside counsel are previous experience of the firm/lawyer in contentious proceedings and personal knowledge of the lawyer being selected.
In selecting outside counsel, respondents showed a slight preference for arbitration specialists over those with industry specialism (55% versus 45%), although industry knowledge is the most important factor in selecting outside counsel for respondents in the Construction sector. In defining “industry knowledge”, corporations attach more importance to a commercial understanding of their industry, rather than pure technical knowledge or qualifications.
There is a trend towards increased involvement of in-house counsel in case management driven, in part, by a desire to control costs better. More corporations are employing dispute resolution lawyers to augment their in-house capabilities.
Once a decision to arbitrate has been made, few corporations (11%) withdrew from proceedings because of funding difficulties.
Most corporations have used alternative fee structures for their external lawyers (i.e. other than hourly rates); the most common types are “capped fees”, or combinations of discounted hourly rates with success-based fees. Pure contingency fees are rare.
The use of third-party funding and “before the event” insurance, remains relatively uncommon with, respectively, 6% and 20% of participating organisations having used these options to fund disputes.
While international arbitration is preferred to other dispute resolution mechanisms across industry sectors, many corporations continue to express concerns over costs and delays in arbitration proceedings.
For respondents who considered arbitration not to be well suited to their industry, costs and delay were cited as the main reasons more than any other factors.
Notwithstanding these concerns, lack of arbitrator availability was not cited as one of the most important factors when selecting arbitrators. This does not mean that corporations were unconcerned about availability but that, on balance, in-house counsel felt that it is more important to appoint the arbitrator best suited to the case rather than one who could potentially complete the mandate faster. This finding differs from that in previous surveys and suggests that, while not satisfied with delays, corporations appreciate that a larger pool of experienced arbitrators will take time to evolve.
The most influential factors in the appointment of arbitrators were the individual’s (1) commercial understanding of the relevant industry sector; (2) knowledge of the law applicable to the contract; and (3) experience with the arbitral process; technical (non-legal) knowledge and language were also cited but were less influential.
Some interviewees have expressed concerns over the “judicialisation” of arbitration, the increased formality of proceedings and their similarity with litigation, along with the associated costs and delays in proceedings. This trend is potentially damaging to the attractiveness of arbitration. In-house counsel value the features of the arbitration process that distinguish it from litigation.