City feels the heat

The reason London is losing international arbitration business to cities such as Paris and Geneva is not solely down to cost.

Deep cultural divisions also exist, argues Mark Smulian

Britain used to be noted for its motorcycle industry, which was full of proud names with positions in the market that seemed unassailable.

Then other countries began to build cheaper machines which, even if not top quality, did the job perfectly well as far as most customers were concerned.

Within a few decades, British motorcycle manufacturing was barely even a niche business.

Could the country's pre-eminent position in international arbitration go the same way, and for similar reasons?

The issue was hotly debated at a recent conference staged by the first barrister Lord Mayor of London, Gavyn Arthur (see [2003] Gazette, 22 May, 1).

The threat from overseas arbitration centres might be relatively small, but it is growing enough for there to be concern among specialists that if the City of London ignores what is happening elsewhere, it could lose a chunk of its business.

The City's great advantages are its financial and commercial power, its position in international time zones, the respect accorded to English law, and its frequent use as the grounding for foreign contracts, which are also written in English.

These have combined to produce a steady flow of work and money into London.

A recent report by International Financial Services London estimated that the capital hosted up to 5,000 international arbitrations and mediations last year (see [2003] Gazette, 5 June, 5).

It has happily shared its strong position in arbitration with New York for a long time, but now other centres like Paris, Geneva and Stockholm are snapping at the heels of both.

Increasing numbers of those thinking of bringing cases to London decide that they do not need what solicitor QC Arthur Marriott, in the London office of Debevoise & Plimpton, calls 'a tendency to work as if in a private version of the Commercial Court', to handle an arbitration.

'London is a rather expensive place to arbitrate, of that there is no doubt, and it has to do with the English process which is often more expensive than that of civil lawyers,' he says.

He adds that English law's emphasis on document disclosure and the examination of witnesses is labour intensive - a factor which inevitably pushes up costs as entire teams of people normally need to be employed.

Mr Marriott says: 'The level of costs is often substantially less in Paris, Geneva and the Netherlands, and an increasing amount of arbitration is taking place in Germany.

'In mainland Europe, arbitration is conducted by civil lawyers and there is a tendency for cases to have shorter hearings, even if they are not shorter overall, and so they are less expensive.' This means, he says, that even if the hourly rates charged in London and elsewhere are not greatly different, the eventual cost of the case can be far higher in London.

'London will maintain its pre-eminent position because of the strength of its financial and mercantile power,' he says.

'But we have to be able to face that it is regarded as an increasingly expensive place to arbitrate and because of that we need flexibility and innovation.'

Tim Taylor, head of litigation at City firm SJ Berwin, maintains that London is not yet losing significant ground as an arbitration venue, but fears it could do so.

He sees an additional problem beyond costs, which he describes as 'the cultural arrogance of English lawyers, and judges to a point', and sees this as a disadvantage when dealing with overseas clients.

Mr Taylor says English and US lawyers tend to be convinced that their legal systems and methods are innately superior to others, although while the use of English in contracts continues, it means that English or US lawyers will pick up most of the work.

'Sweden and Switzerland create a cultural impression of neutrality, as does Holland to a degree,' he says.

'In England, the difficulty is that 78% of judges are white, male, from public schools, have the same set of cultural references and are not aware of their own limitations or of other cultures.'

Mr Taylor fears that this means that when they look at the practices of unfamiliar cultures, they could take 'some pretty racist approaches'.

'For example, in the Arab world large sums change hands with nothing written down.

That tells you that there is a higher degree of trust than in a system like ours, where everything has to be written down from here to eternity.

But our judges see it as a way to cover up a fraud, because they only see it when it goes wrong.'

In the US, the problem is a narrow America-centric view of the world, he says.

'I see a lot of differences between business and legal cultures, but I think in New York law firms you have US lawyers with incredibly parochial views of the world.

They are not cosmopolitan people but they deal with international problems.'

However, Mr Taylor says US lawyers tend to be good at 'broad-brush innovations' when confronted with an unfamiliar problem, while their English counterparts 'like to put everything into boxes'.

'Most civil law systems have a requirement to act in good faith, but England has taken this and stuck it into boxes in contracts.

There is a sort of blindness.'

London's position could even be at risk from political factors, he anticipates.

'In certain contexts, it is likely that our support for the US invasion of Iraq will mean that Middle Eastern work will go to Paris, Geneva or Stockholm.'

Philip Croall, a partner in the international arbitration group at City firm Freshfields Bruckhaus Deringer, doubts there will be a post-Iraq effect other than perhaps a 'short-term emotional reaction'.

He says a lot of cases still come to the City and points out that US firms are building up arbitration practices in the capital to take advantage of this.

The problem, he contends, is the inability of many English firms to adapt to the needs of both arbitration in general and foreign clients in particular.

'There is a great tendency among traditional, non-arbitration specialist, English firms to superimpose on arbitration the traditions they are used to,' Mr Croall says.

'They appoint barristers and judges, or retired judges, to sit and attempt to replicate High Court procedures.

I think that is a stifling thing which frustrates clients.'

This lengthy and costly approach is a countervailing factor to the City's natural advantages, he says.

'I think London still does more cases than Paris and the advantage of London is that international agreements tend to be written in English.

It would be very rare, for example, to see the contract for a project to build a dam in Indonesia governed by French law.'

A natural impetus thus arises to take disputes back to the seat of the legal code that governs them.

But with increasing competition, 'leading firms will be prepared to be flexible, and we have to do that,' he says.

Julian Lew QC, head of international arbitration at City firm Herbert Smith, does think that arbitration is migrating.

'London is not as pre-eminent as it was, and other places are very eminent.

In the old days, disputes involving, say, Asia and Europe might come to London as a neutral venue but now might go to a venue in Asia, perhaps Singapore or Hong Kong,' Mr Lew says.He adds that growth in the volume of work may shield London from this effect by giving it a slightly smaller share of a larger market.

Mr Lew is also worried by the cost of English cases: 'They can be very expensive, but you do get the top-quality lawyers you will need for a complex case.

'The real issue is the way arbitration is run on detailed examination of witnesses and document disclosure, factors of common law jurisdictions that lead to higher costs than in a civil law jurisdiction.'

English lawyers ought also to reconsider their assumptions of superiority, he suggests.

'It is absolutely right that English law is an excellent system, but so are many other systems.'

It seems that - if arbitration in the City is not to go the way of the British motorcycle market - lawyers may need to learn a little more humility.

Mark Smulian is a freelance journalist