Should the courts hear more appeals against arbitrators’ decisions?

Cwm Giedd: attractive venue with good facilities, or remote dead-end?

This posting is a response to a lecture given by the Lord Chief Justice of England and Wales, Lord Thomas of Cwmgiedd, on 9 March 2016. The title of the lecture was Developing commercial law through the courts: rebalancing the relationship between the courts and arbitration.

The central argument of Lord Thomas’s lecture is that legislation brought in 36 years ago to make England and Wales more attractive as a venue for arbitration is having a long-term, detrimental effect on the development of English contract law.

The Arbitration Act 1979 strictly limited the circumstances in which a party could appeal against an arbitrator’s decision to the courts. According to Lord Thomas, before the Act was brought in:

• “Much was made of delay, the cost and expense and lack of finality because of the [appeal] procedure. It was said to make London an uncompetitive venue for dispute resolution.”
• 300 applications to appeal were made each year in the English courts against arbitral awards. After the Act was introduced, this dropped to 50 a year. Only a third of these applications are accepted and lead to a hearing of the substantive issues.

It seems that the Act was successful in helping to establish a thriving market in arbitration in England and Wales. But a consequence of this success is that the English courts (including the appeal courts) are hearing fewer commercial cases. In some market sectors, the courts (it is said) have an insufficient throughput of cases to enable the common law to adapt to changing commercial practices. Again in the words of Lord Thomas:

• “[A] consequence has been to undermine the means through which a significant part of  [London’s] strength – its ‘excellence’ [-] was developed.”
• “[The loss of cases to arbitration, and loss of appeals to the courts] reduces the potential for the courts to develop and explain the law.”
• “[Another effect is] retarding public understanding of the law, and public debate over its application.”
• “The restriction in relation to appeals where the question is one of general public importance is, I have little doubt, a serious impediment to the growth of the common law.”

Reading the speech, IP Draughts struggled to relate it to his own experience of commercial contracts. It seems that Lord Thomas has past experience as a judge of the Commercial Court, though much of his time now as Lord Chief Justice is devoted to the criminal justice system. The Commercial Court is set up to handle high-value contract disputes, particularly in traditional areas such as shipping and insurance, and these areas seem to be the focus of Lord Thomas’s concerns.

But the Commercial Court is by no means the only part of the High Court that deals with contract disputes. The Technology and Construction Court deals with many contract disputes concerning computer technology, and the Chancery Division tends to be the place where disputes concerning IP contracts are heard, on topics as diverse as the licensing of the patents for the blockbuster drug Humira, or Elton John’s management and recording contracts. Other commercial disputes find themselves in the general list of the Queen’s Bench Division or elsewhere in the English court system. The development of English contract law through reported cases is not necessarily prejudiced just because one part of the court system has a reduction (but not a complete drying-up) in case numbers in certain market sectors.

That the lecture is focussed on the diet of the Commercial Court becomes clearer in a key sentence in paragraph 23, where Lord Thomas refers to:

…particularly relating to the construction industry, engineering, shipping, insurance and commodities, there is a real concern …at the lack of case law on standard form contracts and on changes in commercial practice.

This sentence is also helpful for clarifying which aspects of the development of the law Lord Thomas is really concerned about, namely:

1. Case law on the interpretation of clauses in standard form industry contracts, such as those developed by trade associations. In some industry sectors, parties tend to use these standards rather than draft bespoke contract terms.
2. Changes in commercial practice in the above sectors. Lord Thomas goes on to the refer to new Financial List, where specialist judges “are expected to keep up to date with the changes in practice in the financial markets and to resolve disputes on the basis of their specialist knowledge and understanding of the markets…” This comment helps to explain what he has in mind: that judges should apply their knowledge of market practice when interpreting the contracts that parties have entered into in that market.

While undoubtedly important, these topics are so specific as to be irrelevant to the areas of commercial law in which IP Draughts practises. Even if these areas of the English courts’ work become fossilised through a lack of throughput of cases, it won’t result in a “serious impediment to the growth of the common law” in relation to business contracts more generally.

Several aspects of Lord Thomas’s argument trouble IP Draughts.

1. The law on the interpretation of contracts is much wider than the two aspects highlighted above. There are more fundamental and general questions such as whether liquidated damages clauses are enforceable (the subject of a recent Supreme Court case), or what amounts to valid consideration, or what categories of loss are recoverable for breach of contract. The law in these and many other areas continues to be developed through a large number of court cases. In fact, we are suffering from a glut of cases on Bailii, so many that it is difficult to keep up to date with them, including many reported decisions in the Commercial Court. This didn’t use to happen a couple of generations ago, when reported cases tended to be limited to those that established a new principle or had some other outstandingly important quality.
2. In many areas of commercial practice, the judges really don’t have much insight into commercial practice in the industry sector, because the throughput of cases is too small, and would be even if all arbitrations were diverted to the courts. IP licensing is a good example. Not only are there few cases in the courts, judges can’t rely on experience gained when they were barristers, because very few IP licence agreements are drafted or negotiated by barristers in private practice.
3. A distinction should be made between interpretation of industry-standard contracts, where the court may be strongly influenced by the interpretation of the same clause by an earlier court, and the larger number of other (non-industry-standard) contracts, where the courts tend to be reluctant to place much weight on the interpretation of similar words in an earlier contract. In other words, Lord Thomas’s comments about interpreting standard form contracts are not relevant to contracts generally. For example, this is true of his statement that “courts [give] definitive rulings on the scope and interpretation of contractual clauses.” In fact, the misguided view of some that the courts do develop standard interpretations of contract wording is often trotted out as an argument against updating template agreements or changing from old-fashioned legalistic contractual language to modern English. It is disappointing that Lord Thomas was not clearer that his remarks in this area were limited to industry-standard contracts.
4. Contrary to Lord Thomas’s view, IP Draughts has some sympathy with the comments of Lord Denning in the Nema case, which Lord Thomas summarised as “that a commercial arbitrator was more likely to be better placed to interpret the contract in a commercial sense than a judge…” Perhaps Lord Thomas is right to dismiss this comment in relation to contract disputes in markets with which he is familiar. IP Draughts, however, can foresee many situations in which a well-chosen arbitrator, with experience of IP licensing, would be better able to reach a commercial conclusion on the interpretation of an IP licence agreement than a High Court judge. This is not to say that he would always prefer arbitration over litigation, but he thinks Lord Thomas is on dodgy ground if he is arguing that judges are better than arbitrators at interpreting the commercial intentions of contracting parties.
5. The extracts from the lecture quoted above include references to the importance of “public understanding of the law and public debate over its application”. Elsewhere in the lecture Lord Thomas makes a similar point, where he comments that “open court proceedings enable people to watch, debate, develop, contest and materialise the exercise of both public and private power”. This theme struck IP Draughts as a weak argument to use in relation to the development of contract law. Other areas of the law, such as criminal law or defamation, seem more likely to attract public interest and debate than incremental developments in the canons of construction or other principles of contract law.

IP Draughts is left feeling that Lord Thomas probably has a valid point to make (though IP Draughts has insufficient experience of the market sectors that Lord Thomas cites to know whether this is the case), but that he weakens his argument by making it too broadly. It will be interesting to see if others, including companies that make use of arbitration in England and Wales, agree that something needs to be done to rebalance the relationship between the courts and arbitration.