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2013 Corporate Choices in International Arbitration: Industry Perspectives

PWC SIA arbitration survey 2013

The 2013 survey ‘Corporate choices in International Arbitration: Industry perspectives’ is the fifth carried out by the School of International Arbitration since 2006, as part of a major investigation into arbitration practices and trends worldwide. The objective of the survey was to provide empirical evidence on a number of new areas of interest to both users of international arbitration and practitioners. Some of the key areas include:

  • the use of arbitration by corporations in different industries, with an emphasis on three key sectors (Financial Services, Energy, and Construction);
  • the impact of the 2008 financial crisis and the 2012 eurozone crisis on the level of disputes, and methods for resolving them;
  • the factors impacting corporations’ decisions on whether to pursue disputes and choice of external counsel; and
  • the prevalence and impact of third-party funding and alternative fee structures.

Survey findings

The key findings from the study are:

Choice of dispute resolution mechanisms

  • Overall, businesses continue to show a preference for using arbitration over litigation for transnational disputes, although concerns remain about the costs of arbitration.
  • The survey confirms that arbitration is more popular in some industry sectors than others, most notably in the Energy and Construction sectors.
  • 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 in that sector.

Choice and role of outside counsel

  • 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.
  • Rankings of law firms in directories were not regarded as particularly influential.
  • 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.

Internal decision-making on arbitration matters

  • 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.

Funding

  • Once a decision to arbitrate has been made, few corporations (11%) withdraw 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.

Cost, delay and the fear of “judicialisation” of arbitration

  • 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.

Outlook for arbitration:

  • 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, Asia or 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.

Contact:

Rémy Gerbay, LLB, MA, LLM (Attorney New York, Solicitor England and Wales)
PwC Research Fellow in International Arbitration

School of International Arbitration
Centre for Commercial Law Studies
Queen Mary, University of London
67-69 Lincoln’s Inn Fields
London WC2A 3JB

Tel: +44(0)20 7882 8100
Email: r.gerbay@qmul.ac.uk

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