Although there is no doubt that London remains the preferred location for international arbitration, the last two years have seen reduced appetite for arbitration with total appointments down 7% on 2015 and down 18% on 2014 according to the most recent LMAA figures. The last two years have also seen a benign claims environment with the most recent P&I renewals seeing either no general increases or a return of premium to ship owner members.
In our view there are number of factors behind the decline. We list just a few below:
- The shipping market has essentially been flat for the last 3 years, although we are seeing some signs of life in terms of a potential market upturn. A flat and low market means more ships laid up, a low freight market, low commodity prices and low asset prices. In short, although there are disputes (there will always be disputes) there are less ships to have disputes about and the value of those disputes is generally lower.
- Many disputes are in fact defaults where the counterpart is insolvent. What is the point of commencing arbitration if there is no prospect of making a recovery? After the recent Hanjin collapse, it was suggested that the lawyers would do very well. However, as any lawyer will tell you, it is very difficult to initiate or continue with an arbitration against an insolvent party. The remedy is to file the claim in the insolvency proceedings and, in most cases, the liquidator or administrator will accept the claim. The lawyer representing the liquidator or administrator will do very well but there are no disputes and nothing to arbitrate in relation to those representing the creditors.
- Other disputes are settled because of the risk of insolvency of the counterpart. In other words, the parties do a deal to keep the counterpart alive as there is then at least a prospect of getting something back in the future. Sometimes arbitration proceedings are initiated but rarely are the claims progressed where those proceedings may force the counterpart to consider insolvency.
- Although, by comparison to London, other arbitration centres are relatively insignificant, there is some evidence that appointments in other centres such as Singapore are on the rise, notwithstanding recent market conditions.
Although the total number of appointments are down, it is notable that the LMAA Small Claims Procedure (SCP) is increasing in popularity. The SCP appointments for 2016 were 25% up on 2015. That shows that ship owners and operators like the streamlined procedure and fixed cost option of small claims arbitration. The LMAA has recently revised its rules to expand the upper limit for SCP from US$50K to US$100K. In our view this will result in more appointments in 2017.
Although there is little that lawyers can do about market conditions, there is no doubt that the flat market and reduced appetite for arbitration has changed the legal market. More arbitration cases are now handled by boutique specialist lawyers as there is increased attention on efficiency, expertise and costs. Consequently, the smaller specialist law firms are attracting the talent and know how when it comes to contentious work. The larger law firms are increasingly moving away from contentious work into what they perceive to be more lucrative finance and non-contentious arenas.
When we ask our clients what they don’t like about arbitration, the most common complaint is that the process is far too long from start to finish. Second is the overall cost of arbitration and the inability to work out their best case/ worst case scenarios, most often due to the opacity of legal fees. In our view, there have been considerable improvements in this over recent years and that is probably due to the market conditions. The LMAA and Professional Bar are conscious of the need for more professionals prepared to accept appointments as arbitrators. Appointments are being more evenly spread and it seems that this has resulted in a more streamlined process. At the same time, specialist arbitration lawyers are offering more attractive charging structures to their clients which enable those clients to take a considered view on their best and worst case scenarios. In short, the overall service has been revamped and revived which keeps London out in front of its major competitors.
Finally, the market has shown signs of activity in recent months and rapidly rising markets provide a fertile environment for disputes. In short, a considerable upturn could see increased scope for arbitration. It is important that London retains its expertise and focus so as to take advantage of increased demand for international arbitration.