Corporate choices in international arbitration 

The Queen Mary School of International Arbitration in London recently conducted a survey on international arbitration. During a presentation at the Arbitration Foundation of Southern Africa in Johannesburg, Colm Tonge, partner at PricewaterhouseCoopers (PwC), which sponsored the survey, highlighted important aspects of the research. 

Mr Tonge said that the purpose of the survey was to introduce the topic of corporate choices in international arbitration. He added that international arbitration was resorted to when companies or corporations from different jurisdictions became engaged in disputes, which was occurring more frequently. 

He said: ‘There is no doubt that the volumes and the complexities of disputes internationally have increased and it is very clear that disputes will follow capital.’ 

If there is inward investment in countries, there will surely be international disputes over time, said Mr Tonge.

The survey 

Discussing the research methodology, Mr Tonge said that the survey looked at international arbitration as an industry from the perspective of the buyer, namely general counsel or corporates. He said that the survey involved interviewing more than 100 corporate counsel, as well as in-depth interviews with those who had strong views and relevant experiences. 

Mr Tonge said that the industries focused on were energy, financial services and construction. 

The topics addressed by the survey were the suitability of arbitration as a process, the impact of the 2008 financial crisis, factors that influence corporates to pursue disputes, how external counsel is chosen and third party funding. 

Suitability of arbitration
Mr Tonge said that the survey revealed that arbitration was the first-choice method of dispute resolution for respondents. He said: ‘There is a common consensus out there that arbitration is the preferred form of resolution of these disputes. Whether that is factual or whether it is a myth remains to be seen. Based on the survey, we can see clearly that the first-choice method of resolving international disputes in more than half the cases is arbitration – that is as many as litigation, expert determination and mediation put together. It is also the least resisted one, with only 6% saying it is their least favourable form.’ 

Mr Tonge added that arbitration was preferred equally by claimants and respondents. 

He said that in 2008 a survey was conducted to gauge industry satisfaction with arbitration and the results showed that 86% of participants felt that the process was good and fair, which was mirrored in the current survey. Mr Tonge said that arbitration was ‘definitely the preferred form of resolution’. 

In terms of arbitration preference in the different industries, Mr Tonge said that there was a 68% preference for arbitration as a first choice in the construction sector, while the financial services sector did not have a clear preference for arbitration. He added that in the energy sector there was a slight preference for arbitration. However, he said: ‘When we look at whether arbitration is suitable for resolving disputes, all three industries had a pretty high approval rating for arbitration. … This shows us that, although it is not the method that is used in financial services, it is believed to be a good one … . Maybe there is more potential for arbitration in financial services in future.’

Pursuing disputes

Mr Tonge said the survey showed that in more than half of the cases the ultimate decision-maker on whether or not to proceed with a matter was the relevant chief executive officer or board of directors, but the general counsel of the corporation had significant influence over other related decisions, such as whether or not to use outside counsel. In 71% of the cases general counsel was a key driver in the decision on whether or not to initiate formal proceedings. 

In relation to internal decisions regarding arbitration matters, Mr Tonge said that a key factor in making that decision was the strength of the legal position, which 40% of respondents felt was key in deciding whether or not to pursue a matter, while 36% felt that the strength of the evidence was more important. 

Adding to this, Mr Tonge said that legal costs did not seem as significant in the decision whether or not to initiate proceedings and, while costs were a concern, they were not an inhibiting factor in deciding whether or not to proceed with a matter. 

Costs and international arbitration

On funding international arbitration, Mr Tonge said: ‘Costs have been a major issue around international arbitration for some time. It has almost imperatively been proven that international arbitration can be more expensive than litigation – that is why costs are a recurring issue. Corporations are taking action to address this, and one of the ways they seek to reduce costs and delay – which are seen as the two difficult pillars of international arbitration – is to recruit in-house counsel that are specialists. … There is more control over costs and delay timing if the matter is dealt with internally.’

He added that corporations were looking at alternative fee arrangements. He said that 61% of the survey respondents had some kind of capped fees or blended rates and a number had a basic fee, a discounted rate or a success fee that was either based on the result in damages or a percentage of the fee. He said that 10% of the respondents had a pure contingency fee arrangement.

Outside counsel

In terms of choosing outside counsel, Mr Tonge said: ‘Overwhelmingly, past experience with the firm or the lawyer was the deciding factor. Personal knowledge of the lawyer being selected was also very significant, but slightly less important were other in-house counsel recommendations, the reputation of the firm, and the ranking of the firm.’

He said that in the construction industry it was important for the person selected to have industry experience – 56% of the respondents felt that this was the most important part of making this decision. 

He added that in the energy industry it was less important for the person to have industry experience, while the financial sector considered it equally important for the person to have experience in arbitration and for the person to be a financial services expert. 

Mr Tonge said that 88% of respondents felt that general counsel was the driving force in choosing outside counsel and general counsel influenced which mechanism should be used to resolve disputes at the drafting stage. 

Influence of the financial crisis

Mr Tonge said that there was a false perception that the global financial crisis would lead to a significant increase in disputes. 

‘This has been disproven at this stage by the survey, in that there is no particular increase. There is no obvious correlation between the financial crisis and some of the difficulties in the eurozone, and that probably reflects a pragmatic approach by financial institutions to resolve issues through negotiation rather than going the more formal route. Equally, it looks like the impact of the crisis on the choice of dispute resolution mechanisms used to settle international disputes is leaning towards arbitration. However, there is a concern around what is called “judicialisation”, which means … the lawyers run the process, having undue influence over the process, so that the ultimate end user may not be in control of the process.’ 

Conclusion

In concluding the presentation, Mr Tonge spoke about investment treaty arbitration. He said that, in terms of this, the oil, gas, mining, and energy and power industries had given rise to the most disputes, and they were the sectors where resource nationalism would play a role. 

‘Investment treaty arbitration involves governments and organisations fighting over, for example, a mining contract. A new government comes into power and does not honour the previous government’s commitment and an investment treaty dispute arises,’ said Mr Tonge. 

Mr Tonge added that in these situations there was a disparity in the location where the dispute arose and where the arbitrators were situated. 

He said: ‘By far, the majority of arbitrators are from western Europe and relatively few of the disputes are from there. … A significant amount of the disputes is in sub-Saharan Africa, but relatively few of the arbitrators come from there. We are hopeful that this picture will change over time, but it probably will take time. For instance, 37% of disputes arise come from there. These disputes are being resolved [by] arbitral bodies in western Europe.’

Mapula Sedutla, 
mapula@derebus.org.za