London is in the forefront of providing international arbitration. So how are city law firms responding to the increase in demand? Cameron Timmis reports

As more companies choose arbitration to settle their international disputes, London is emerging as one of the world’s top arbitration centres – with UK law firms reaping rich rewards. What was once a fringe pastime pursued by a coterie of lawyers has become a major practice area in its own right, with many City firms now fielding specialist teams. With litigation volumes increasingly on the wane, could arbitration be the next big thing?


Because of the confidentiality of most international arbitration work, it has always had a certain mystique – indeed, its leading exponents have long been tagged the ‘arbitration mafia’. While this is often appealing to clients – who want to avoid the media prying into their problems – it also means it is difficult to get a true picture of the actual levels of work being done. But judging from the growth in many firms’ arbitration practices, and from the few statistics available, such work is clearly on an upward curve.


A recent survey of litigation partners and in-house counsel by accountancy firm Grant Thornton showed that while private practice lawyers expected their departments to grow over the next three years, their in-house clients anticipated spending less or at least no more on resolving commercial disputes than they do now (see [2006] Gazette, 2 February, 6). It was suggested that the gap could be filled, at least in part, by rising international arbitration and mediation.

There is some evidence that this is already happening. According to figures released last month by the London Court of International Arbitration (LCIA), the number of cases referred to the organisation increased by 35% between 2004 and 2005. In those two years, a total of 202 cases were referred, an increase of 7.5% over the previous two-year period. Figures from the larger Paris-based International Chamber of Commerce (ICC) International Court of Arbitration tell a similar story, with 521 cases referred in 2005.


However, these figures do not capture the significant number of ad hoc arbitrations that are organised by the parties themselves without the involvement of any outside institution. Some lawyers estimate there are as many ad hoc as institutional arbitrations.


Magic circle firm Clifford Chance has one of the largest arbitration practices in London, with a specialist team of five full-time arbitration partners. According to partner Audley Sheppard, the group accounts for between 15 to 20% of the firm’s total litigation revenues in London. Magic circle firms Allen & Overy and Freshfields Bruckhaus Deringer have slightly smaller practices, with three full-time arbitration partners each in London, but like most firms, have many litigators who will act as arbitration counsel from time to time.


All told, there are now around 20 law firms with international arbitration expertise in London, a number that has been boosted by the significant, and growing, cadre of US law firms that practise arbitration in the capital. ‘It’s a real growth area, there’s a lot of it around, and we’re seeing increasing amounts of arbitration in different sectors,’ says Gautam Bhattacharyya, head of the arbitration group at City firm Richards Butler. ‘That’s a trend we expect to continue.’


Many lawyers see the sharp rise in international arbitration as simply a function of globalisation and increasing global trade. ‘So many deals are going cross-border,’ explains Allen & Overy arbitration partner Matthew Gearing, ‘that unless one party has an overwhelming upper hand, neither side is going to be happy to go to the other sides’ court.’ As a result, he says, demand for arbitration clauses in international contracts – which provide a neutral forum to resolve disputes – ‘is going through the roof’.


To respond to this demand, Allen & Overy’s arbitration group has recently set up a weekly rota, with two arbitration lawyers on permanent standby to advise transactional lawyers on how to draft an appropriate arbitration clause.


According to Mr Sheppard, it is arbitration rather than litigation that is now the preferred choice for parties trading outside the EU. ‘Arbitration is an obvious compromise,’ he says. ‘It takes the dispute outside the jurisdiction of the national courts… it means the dispute takes place in a generally neutral venue and with arbitrators who are independent of the parties.’


It is not only disputes arising from international contracts that have generated work for arbitration lawyers. A relatively new area is so-called investment treaty arbitration, which involves disputes between investors and sovereign states. The number of investment treaty arbitrations has soared as a result of the growth in bilateral investment treaties (BIT). Crucially, BITs, which guarantee legal rights for inward investors, also include a right to submit a dispute to arbitration – even if the investor has no contract with the state in question.


This form of arbitration, which typically takes place under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) in Washington DC, has grown exponentially since the late 1990s, with the number of cases filed now approaching 250. Geoff Nicholas, head of Freshfields’ London arbitration group, says the firm has done a ‘very large number’ of these disputes and currently has ‘four people who do nothing but Latin American treaty arbitration’.


Once touted as a more flexible, cheaper alternative to litigation, most lawyers concede that this argument for arbitration no longer holds true. ‘No one thinks it’s quicker and cheaper – and it isn’t,’ says Chris Newmark, an arbitration partner at City firm Baker & McKenzie. He is currently co-chairing an ICC task force looking at ways of trying to reduce some of the costs in arbitration cases, such as the costs of disclosure and expert evidence. ‘In international arbitration you get a combination of civil law and common law,’ he explains. ‘When you combine the two, you don’t want the worst of both worlds. That’s something we’re looking at.’


It is not just the legal fees that can be costly in international arbitration, but also the additional cost of paying for arbitrators, and the administrative costs of the arbitration institution. This can be substantial. At the ICC, which charges fees based on the value of the dispute, a $20 million (£11 million) claim will cost parties between $150,000 and $540,000 for arbitrators’ fees and administrative expenses, while a $200 million claim will cost up to $1.1 million – and alarmingly, much of this has to be paid in advance. At the LCIA, generally considered cheaper than its ICC counterpart, and which charges on an hourly rate, arbitrators’ fees are usually between £2,000 and £2,500 a day.


Historically, most international arbitration has taken place in centres such as Paris, as home of the ICC, or well-known neutral locations such as Geneva, Zurich and Stockholm. Over the past decade, with the growing use of English law in international contracts and with its status as world trading centre, London has made a steady climb up the international arbitration ladder. Many now place it on a par with, or even above, rival arbitration centres.


‘London is a very popular venue for international arbitration,’ says Allan Connarty, operations director at the Chartered Institute of Arbitrators. Mr Connarty attributes much of London’s success to the landmark Arbitration Act 1996, which gives parties considerable power to shape the arbitration process and curbs the ability of the court to intervene in arbitration proceedings.


‘The Arbitration Act has made a huge difference,’ agrees Juliet Blanch, a UK arbitration partner at the London office of US firm McDermott Will & Emery. ‘It made the courts very pro-arbitration. It showed that England was serious, that it wanted to serve the international community and that it was prepared to take a more international approach.’


Others credit the LCIA with helping to raise London’s profile in international arbitration. According to LCIA statistics, only 21% of arbitration cases administered by it involve UK parties. Increasingly, its cases come from all corners of the globe, with a substantial number involving US, European or Asian parties. ‘It’s a reliable institution with good rules, it’s well administered and it’s got a good body of arbitrators,’ says Mr Nicholas. Indeed, his Freshfields’ colleague, international head of arbitration Jan Paulsson, is currently LCIA president.


With the increasing profile of London in international arbitration – and the overall trend towards arbitration in place of litigation – it is no wonder that more firms are looking closely at the opportunities in the market. City firms SJ Berwin and DLA Piper Rudnick Gray Cary are just two firms known to be actively marketing their arbitration practices. It remains, in many law firms’ eyes, one of the few areas of dispute resolution practice with serious growth potential.


But newcomers beware, says Mr Sheppard. ‘The market is overcrowded… there will be a shakeout, and people will go back to litigation practice.’


Cameron Timmis is a freelance journalist