Arbitration is seriously impeding the development of commercial law, the lord chief justice has warned, calling for a redressing of the balance between the two.

In a speech last week, Lord Thomas of Cwmgiedd (pictured) said that in retrospect the UK took a ‘wrong turning’ in 1979 and in 1996 when it introduced measures to make arbitration more attractive in the international market.

The measures centred around limiting the number of appeals that would come before the courts, to give more finality and certainty to arbitration awards. 

Thomas said limiting the number of appeals reduces the potential for the courts to develop and explain the law, which he said could endanger the development of the common law as the framework to underpin international markets, trade and commerce. 

He said: ‘The change has been hailed as a “pragmatic compromise”, but the clear consequence that can be seen today is that far fewer developments of the law are made in areas where the probability is that the case has had to begin in arbitration.

'As arbitration clauses are widespread in some sectors of economic activity, there has been a serious impediment to the development of common law by the courts in the UK.’ 

He noted that across many sectors of law traditionally developed in London, particularly relating to the construction industry, shipping, insurance and commodities, many have expressed concern about the lack of case law on standard contracts and changes in commercial practice.

Thomas said that the time is right to look again at the balance between arbitration and the development of common law.

Outlining three ways in which the balance could be redressed, he suggested revising the criteria for appeals, to go back to a more flexible test for permission to appeal.

This would enable the courts to more readily develop the law whilst leaving arbitration as an important means of dispute resolution, he said. 

Greater use of section 45 of the Arbitration Act could also be encouraged, to enable the court to give decisions on points of law arising after the start of arbitration.

Finally, Thomas suggested a greater shift towards litigation. He said that many of the perceived benefits of arbitration, namely that it is confidential, allows greater ease of enforcement and is cheaper and more efficient, were not clear cut and would not stand up against detailed scrutiny today.

He said: ‘Many now see the advantage of court proceedings for some types of dispute, particularly those where the issue at stake is of wide application. The courts have shown that they can lead the way in innovation and in short-form dispute resolution.’ 

Thomas also said there is a need to examine whether other markets would be prepared to follow financial markets, by waiving arbitration in cases where there are significant points of general interest that would be better determined in court.

He said: ‘There is an increasing realisation […] that what matters more to the centrality of the common law, particularly as developed in London, is its use as a basis for doing business. That is, in my opinion, a far more important consideration than the business of dispute resolution in London.’