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CIArb Features

Litigation or ADR – The Tide is Turning

12 October 2017 Features

The courts of England and Wales have played a substantial role in democratic society for centuries.  It is the right of every individual to have grievances determined by an independent tribunal funded by the state. Although official documents to commence legal proceedings have changed over the years (the well-known 'writ' gave way to the 'claim form' in 1999), now the courts encourage parties to resolve matters by other means so that a civil action going to trial should be the exception rather than the norm. 

The number of claim forms issued in the High Court in 2016 was 9274.  The Small Claims Court is a free service for claims up to £300.  Conventional wisdom has always been that about 95% of all proceedings commenced never reach trial. 

The alternative to court proceedings is alternative dispute resolution (ADR).  The different forms of ADR include:

  1. Arbitration (see below)
  2. Mediation
  3. Early neutral evaluation
  4. Conciliation
  5. Expert determination (contractually binding)
  6. Adjudication (for construction disputes).

An obvious question is, if proceedings lead to some kind of ADR to resolve them, then why commence proceedings at all?  This is exacerbated by the cost of issuing proceedings.  To issue a High Court Writ (before it became a claim form) was £66.  Today, for claims between £10,000 and £200,000 the fee is 5% of the claim, for a claim of £200,000 it is £10,000.  In addition, for any applications made to court, say for example, specific discovery, there is a court fee of £255. Legal aid for civil disputes is virtually a thing of the past. 

In the light of this, different forms of ADR may be the best means to achieve an economic resolution to a dispute.  Care needs to be taken not to fall foul of the limitation period, where a remedy is barred if a claim is made more than six years after breach of contract or from when damage is suffered in negligence claims[1].  This can be dealt with by means of a limitation standstill agreement agreed between the parties, which is usually a legal document which can be drafted without legal assistance but is best completed by a solicitor.  By this, limitation stands still whilst the parties search for a resolution outside formal court proceedings.  That prevents costly claim form issue fees, whereby proceedings are commenced just to prevent a claim being statute barred by limitation. 

It is Arbitration which bears the greatest similarities to legal proceedings.  This is effectively a private case with an arbitrator appointed by the parties.  For there to be an arbitration, an arbitration agreement is needed or if there is no contractual agreement between the parties to refer disputes to arbitration, by agreeing to a set of rules in various different schemes such as the Business Arbitration Scheme ("BAS") (see post). 

With the best will in the world, businesses encounter disputes.  Everyone does in everyday life.  Usually they are dealt with by common sense but sometimes a dispute becomes protracted and difficult to resolve without the intervention of a third party.  Formal legal proceedings may be said to be the heaviest form of dispute resolution but, as can be seen above, it comes at a cost.  Whilst a Judge is paid for by the state, an arbitrator is remunerated byCivi the parties, usually at an agreed fee or hourly rate.  However, costs can be kept under control. There can even be a cost capping order[2] made by the Arbitrator.  The parties are free to arbitrate as they see fit, with the agreement of the arbitrator (save for in a few instances where there are mandatory rules under The Arbitration Act 1996). 

The advantages of arbitration are many.  In particular, quite apart from cost, arbitrations are confidential.  This enables businesses to protect their reputations.  Therefore, a dispute, however important it may be, can do more damage by exposure to the public through formal legal proceedings and therefore arbitration protects confidentiality and thus has a wider advantage than legal proceedings. 

The parties can also agree that there is no appeal on a point of law but, if they do not, then appeals can be brought in the court under Section 69 of The Arbitration Act.  Not only is this a rarity, and the grounds very narrow, but the courts are reluctant to take an active role once the parties have agreed to arbitrate.  This is illustrated in the Supreme Court judgment of NYK Bulkship (Atlantic) NV v Cargill International SA (2016) UKSC 20.  It arose from an arbitral award relating to the interpretation of an off-hire charter party clause.  It raised an important legal question about agency.  The parties had chosen not to exclude Section 69.  Both parties initiated and continued appeals through to the Supreme Court, clarification of the term in question being very important to them.  Nonetheless, at each stage of the appeal process, the courts restricted themselves to the specific points of law raised.  At every level of the appeal, the courts respected the parties' choice to arbitrate by remitting the Award back to the original arbitration tribunal, having clarified the point of law.  The final outcome after the parties had recourse to three courts to challenge the Award was that the tribunal's original Award was upheld. 

There is an ongoing debate over the role and impact of arbitration in the development of English law.  In a widely reported lecture, the Lord Chief Justice, Lord Thomas, suggested that the increased popularity of arbitration as a preferred method of dispute resolution has led to a "serious impediment of the development of the common law by the courts in the UK …".  The point was that the privacy of arbitration stopped important legal decisions being made publically available and from being used to test and develop the common law.  Nonetheless, many have since argued that disputing parties should not be obliged to finance the development of English commercial law. 

Particularly for disputes which, however important to the parties, do not involve substantial sums, there are other advantages to arbitration which should be of interest to businesses.  In particular:

  1. An arbitrator can be appointed who has a specific set of expertise or knowledge.  The parties also have the ability to choose a number of arbitrators (albeit this is unusual for lower value cases).  In formal court litigation, this is impossible beyond choosing a typical court within which to issue proceedings. 
  2. The parties are able to adopt the procedures to the requirements of the dispute.  Therefore, for example, argument can be limited to a set number of pages without any requirement to give oral evidence.
  3. Confidentiality as referred to above.
  4. Limitation of appeals as referred to above.
  5. Enforceability (all arbitrations are fully enforceable by the courts (see Section 66 Arbitration Act 1996).

There are therefore real advantages to arbitrating.  There are also a number of scheme which are designed to resolve disputes quickly and economically.  Examples are:

  • ABTA scheme to settle breaches of contract/negligence travel claims between consumers and ABTA members;
  • RICS Arbitration Scheme in relation to surveyor claims;
  • Chartered Institute of Arbitrators own BAS Scheme.

The BAS Scheme is particularly interesting.  The scheme provides for a simple, cost effective and timely resolution of disputes of low to medium monetary value (£5,000 to £100,000) before a sole arbitrator.  The aim is to provide a final, legally binding decision of the dispute in less than 90 days from the appointment of the arbitrator.  There is a fixed fee of £1,250 plus VAT payable by each party on commencement of arbitration.  The arbitrator is appointed within 10 days of the commencement.  A summary of the case and witness statements is limited by number of words.  There is provision to recover costs by the successful party but it is limited to the fixed fee plus up to a further £1,000.  The arbitrator will issue an award in less than 90 days of the appointment. 

This scheme is therefore of real significance to businesses.  Absent some form of agreement between the parties, it involves the intervention of a third party at minimal cost and reasonable speed.  That is not to say this is the only weapon in the armoury of ADR.  The different forms are summarised above.  Mediation involves an independent third party mediator being appointed by the parties, and his role is to encourage the parties to settle.  There is a fee payable to the mediator.  Most court actions involve orders at a fairly early stage for the parties to attempt ADR/mediation with the threat of cost sanctions for refusal.  Whilst there are ironies that senior members of the judiciary feel that a failure of the appeal process in arbitration has stymied the development of the common law and thus the creation of valuable precedents, it is the courts who are encouraging parties to settle differences by ADR.  Arbitration and mediation are the most common processes.  With legal proceedings becoming more expensive, and relative lack of control compared to arbitration, it is no coincidence that both are becoming more popular. 

Disputes are a drain on the resources of businesses.  It is therefore refreshing that procedures are on hand to assist parties to resolve them quickly and economically, enabling everyone to move on. 

[1] Issuing proceedings before expiry of the limitation period protects against claims becoming statute-barred. 

[2] S65 Arbitration Act 1996