Political Lessons for Legal Risk Managers From the Brexit Vote
It would not be an understatement to say that the outcome of the Brexit vote surprised many legal risk managers worldwide.
1. Keep calm and carry on
Legal risk managers should not make any bold or brash decisions concerning operations or investment in the United Kingdom until things calm down and there is a clear political, economic and social understanding of what the true impact of Brexit will be for both the United Kingdom and the European Union as a whole.
2. It ain’t over til its over
There will be tough negotiations ahead between the United Kingdom and the European Union 27 remaining Member States to work out the divorce terms. This may take years to resolve. It is clear that the stumbling block is that there can be no access to the Single Market by the United Kingdom without freedom of movement for European Union workers. However, the cut from this hard and fast line will hurt French farmers and German automobile manufacturers as much as it does British bankers and airlines.
However, until Article 50 of the Treaty on the European Union (“TEU”) is triggered by the United Kingdom, the divorce is not a done deal. While the UK Government suggests that the Prime Minister has the authority to trigger Article 50 of TEU, it is clear that Parliament would have to pass an act repealing the European Communities Act 1972. The United Kingdom courts would then have to give effect to and follow such a major constitutional act. The question to be asked remains what aspects of European law will remain incorporated into United Kingdom law (England and Wales, Scotland and Northern Ireland) after a Brexit? Nobody knows.
Will the EU Regulation’s March 2014 recommendation to adopt more flexible pre-insolvency processes affect the UK?
In March 2014 the European Commission published its recommendation on “a new approach to business failure and insolvency” which set out minimum standards for a restructuring framework in each member state. The broad market reaction in the UK was mixed ranging from supportive from those sectors favouring facilitation of consensual restructuring ahead of formal process to “it ain’t broke don’t fix it”, particularly from the insolvency profession. The latter view was the dominant view in the UK Government response of March 2015 which followed a brief industry consultation. It cited the widely held belief that the UK system incorporating Schemes of Arrangement, CVA’s and pre-pack administrations was both flexible and efficient as demonstrated by the general direction of forum shopping to London. There seemed little government appetite for legislation change.
Some interested parties did take a different view, pointing to the gap between consensual restructuring where sufficient liquidity kept creditors at bay whilst solutions were negotiated (sometimes called Consensual Creditors’ Compositions), and any process signalling near insolvent distress to the customer and supplier constituency which damaged goodwill and therefore both value and recovery prospects. There were calls for a properly defined automatic stay, consistent methodology and independence in valuations, and post-petition super priority financing. Some influential parties pointed out the better recoveries for consensual restructuring but also acknowledging that once in formal process, the UK system with decisions undertaken by more commercially minded insolvency practitioners than the generally constrained Courts in continental Europe was fast, more predictable and more efficient than the continental counterparts.
Fast forward 12 months and we now see the EU is “assessing the state of play” to see whether further measures to strengthen the move to facilitate restructurings at an earlier stage and to allow debtors to restructure without recourse to formal procedures are required. A multi-jurisdictional panel has been established from across the spectrum of the restructuring professions. In short, are we going to see an EU Directive which could mandate the UK to close the gap between consensual creditors’ compositions and CVA’s?
The Gazprom European Court of Justice (ECJ) judgment will be seen by arbitration practitioners as both a positive decision and an opportunity missed. Practitioners had hoped that the ECJ would provide guidance on the expanded arbitration exception provisions of the Recast Brussels Regulation, in particular whether the narrow interpretation of what falls within the exception that was given in the infamous West Tankers case (Allianz and Generali Assicurazioni Generali (C-185/07)) remains good law or whether it is now possible for the courts of a member state to grant anti-suit injunctions preventing proceedings in another member state in support of arbitration.
The ECJ helpfully reiterated that arbitral tribunals are not bound by the Brussels I Regulations or the principle of mutual trust. It also confirmed that recognition and enforcement of arbitral awards is governed separately by the New York Convention and member state courts are therefore entitled to enforce an anti-suit injunction granted by an arbitral tribunal. However, the ECJ failed to consider the wider implications of the expanded arbitration exception. The judgment therefore creates an odd distinction whereby arbitral tribunals can grant effective anti-suit injunctions to prevent proceedings in a member state in breach of an arbitrational agreement, while it remains unclear whether a member state's courts can do so.
Given Advocate General Melchior Wathelet's December 2014 opinion – which considered this point and concluded that anti-suit injunctions in support of arbitration granted by member state courts were permitted – it had been hoped that the ECJ would attempt to resolve the issues surrounding anti-suit injunctions and the arbitration exception once and for all. It failed to do so and a future ECJ reference which specially deals with this issue in the context of the Recast Regulation is awaited.
The Ibero-American Arbitration Centre (CIAR) was established March 19 2015. The centre was set up to offer an alternative dispute resolution forum to small and medium-sized enterprises with cross-border operations. In this regard, 63 institutions representing 22 Ibero-American countries – including Spain, Portugal and Andorra – have signed a deed of constitution and bylaws, making Madrid as the seat of the general secretariat.
The growing strength of Latin American economies, their international expansion and the increasingly positive approach towards commercial international arbitration in the area, suggests that this new centre could become a relevant player. Keeping an eye on its evolution will be interesting. This post will analyse the scope and approach of the new centre; an overview the Latin American market for arbitral institutions; and lessons learnt from past experiences.
Scope and approach of CIAR
The CIAR constitution was agreed on by the countries which attended the Ibero-American Conference held in Veracruz in 2014. The agreement stems from the approval in Brasilia in 2012 of a framework agreement for the creation of an Ibero-American International Arbitration Centre by the general Ibero-American secretariat. At that time, different practitioners realised the need for a specialised and cost-effective commercial institution for the Ibero-American market.
The issue of saving time and costs is a topic dear to many stakeholders in the business of international arbitration. Institutions are constantly reviewing their rules and procedures in pursuit of this objective.
In a recent paper, Dr Jörg Risse, partner at Baker & McKenzie in Frankfurt, put forward 10 “drastic proposals” to save time and cost in arbitral proceedings. At an event in London on July 1, he explained how his proposals would work in practice and Peter Rees QC responded with four of his own alternative ‘Rees's Rules. These are interesting proposals for discussion and we set them out below. We would welcome any thoughts/comments on whether you consider these might be effective.
Is it possible to create a global culture of mediation? A convention pushing the agenda for the future of alternative dispute resolution (ADR) took a futuristic approach as 150 international users, providers and advisers weighed in on key issues via digital handsets and tablets, with the results broadcast on a big screen for instant interactive input.
The event, organised by the International Mediation Institute, took place at the London Guildhall on October 29, allowing delegates from many stakeholder groups and over 20 countries to take part in a host of debates and accompanying series of votes surrounding user needs, innovation in ADR and the merits of expanding the use of mediation globally.
The main concerns in choosing a dispute resolution mechanism were revealed to be speed and expense (each taking 33% of the user vote), as well as efficiency (13%).
Marks & Spencer’s head of legal, Robert Ivens, commented that for him ADR is an integral part of doing business.
The new arbitration rules of the London Court of International Arbitration (LCIA) took effect on October 1 2014. They will apply to any arbitration commenced after October 1 2014 (irrespective of when the arbitration agreement was made), unless the parties agree otherwise. The LCIA is one of the world's prominent arbitral institutions and has spent the last few years reviewing its rules.
Jacomijn van Haersolte-van Hof, the new LCIA director general, has stated that the aim of the new rules is to modernise, but not revolutionise, the rulebook. While the structure of the former rules remains, the reforms seek to address three central issues:
The key changes are set out below, grouped in accordance with these themes.
Arbitration, as a consensual form of dispute resolution, has been around for centuries, if not millennia (what was Solomon in the dispute between the two mothers over the baby if not an arbitrator?).
It has also taken many forms: one of my favourite stories, beautifully recounted by Lord Bingham in 1989, relates to turkey arbitration. This was apparently commonly adopted by farmers in County Down to resolve their disputes in the 19th century. A turkey hen would be placed on a long table by an impartial chairman selected by the parties to the dispute, with a line of grain down the middle of the table; the turkey would peck its way up the table until the end of the line of grain, when it would be invited to choose between a grain on its right and one on its left; the winner would be the farmer whose grain the turkey selected. This was a quick and impartial way of resolving disputes, and has much to commend it (in particular, as Lord Bingham put it, the parties' ability "to select an expert tribunal").
By contrast, modern arbitration is a complex, and often very sophisticated, form of resolving international disputes. Its exponential growth has been assisted by the wide adoption of the New York Convention, which makes it the ‘only game in town’ for many international transactions (see the following map highlighting the countries which are signatories to the New York Convention, as opposed to the countries which have arrangements with the United Kingdom for the reciprocal enforcement of court judgments).
However, arbitration is currently subject to attack from all sides. It faces a number of criticisms relating to the time and costs involved in the arbitral process. These are being addressed in a number of different ways, and I hope that this blog can be a useful forum to discuss these. In particular, recent years have witnessed the modernisation of many major institutional rules: the International Chamber of Commerce (January 1 2012), Hong Kong International Arbitration Centre (November 1 2013), Singapore International Arbitration Centre (April 1 2013), the Arbitration Institute of the Stockholm Chamber of Commerce (January 1 2010) and the London Court of International Arbitration (coming into force on October 1 2014). A table setting out the differences between the rules of many of the leading institutions can be found here. The common denominator is the increased length. In response to some of the criticisms, the rules now (also) propose to regulate expedited proceedings, the appointment of an emergency arbitrator or the tribunal more generally, the joinder of third parties to the proceedings and the consolidation of parallel proceedings. Yet with the increase of regulation comes the growing need for discretion and – its corollary – consistency. As a result, the institutions have taken it upon themselves to exercise such discretion in order, it is stated, to control consistency.