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The New LCIA Rules: Should arbitration now be the go-to dispute mechanism for corporate debt claims?

  • Market Insight 28 October 2020 28 October 2020
  • UK & Europe

  • International Arbitration

The New LCIA Rules: Should arbitration now be the go-to dispute mechanism for corporate debt claims?

The LCIA's 2020 arbitration rules add some further colour to the pros and cons of arbitration versus litigation. When faced with 'straightforward' debt claims, if there is a choice of pursuing the debt by way of court claim or arbitration, litigation often wins out. However, the LCIA's new rules, which apply to all arbitrations commenced from 1 October 2020, introduce a number of changes which might tip the balance in favour of arbitration. In this article we provide a real life example of how the new LCIA rules (combined with the impact of Brexit) have changed this analysis.

The funded corporate debt portfolio – a cash flow management solution for our times

The age old question of which dispute resolution mechanism to apply is one which faces disputes lawyers the world over. For debt claims, where there is very often no defence (or at least no defence with a reasonable prospect of success), litigation is often the creditor's choice. This is because the English courts, like many other court systems, offer summary judgment – a codified, expedited procedure to obtain speedy judgment where the circumstances allow. Arbitration, on the other hand, can be lengthy and even moribund, forcing a debt claim to go through all the procedural hoops of a complex breach of contract claim.

This question has arisen in the context of Clyde & Co's work on a novel funded claims portfolio for a client. This model, in which we work with a third party funder to pursue all of a client's overdue debt claims on a “no-recovery-no-fee” basis, provides an ideal cash-flow management solution in the straitened times companies currently face. Under the portfolio model, a client can pursue claims which would otherwise be written off because it would be disproportionately costly to do so on an individual basis; instead, smaller claims are aggregated with larger claims and we use efficiencies of scale and standardised documents to pursue all the claims efficiently. The client only pays our fees if we make a recovery, and in most cases a portion of those fees are recoverable from the debtor in addition to the debt.

Most of the claims in the portfolio we are working on have an international element and the underlying contracts contain a clause entitling our client to elect whether to pursue the claim in the English High Court or via arbitration pursuant to LCIA rules.  We therefore have to decide for each case whether to commence court proceedings or arbitration. This decision will be based upon a number of factors - confidentiality, the value of binding precedent and costs, just to name a few. However, for this portfolio, the ease with which a judgment or award can be enforced where the debtor is overseas, and the simplicity and flexibility of the procedural rules (which can impact the cost effectiveness of pursuing a claim) are very important. The new LCIA rules have changed the calculation and, with regard a number of claims, tipped the balance decisively in favour of arbitration. There are a few reasons for this.

What are the practical effects of the LCIA rule change? [1] 

Early Determination

As mentioned above, the main advantage of pursuing debt claims in court has traditionally been the English courts’ summary judgment procedure. This gives a party the opportunity for its case to be determined in its favour at an early stage and at a short hearing, saving both time and costs. It is appropriate if a defence is clearly unmeritorious or unsustainable.

Until recently, international arbitration had no corresponding procedure. Now, the LCIA, following the SIAC [2] and HKIAC [3], provides for the 'early determination' of claims (and defences) that are (a) manifestly outside the tribunal's jurisdiction, (b) inadmissible, or (c) manifestly without merit (Article 22.1(viii)). In open and shut debt claims, this provides a creditor claimant with a mechanism to obtain quick and cheap justice.

Expedited Procedure

The new LCIA rules also encourage the use of the expedited procedure in cases that are relatively uncomplicated but not capable of early determination under Article 22.1. The rules set out specific short-cuts that can be applied by a tribunal to expedite proceedings which includes the power to:

  • limit the content, length or number of pleadings;
  • limit written and oral testimony;
  • employ technology to enhance efficiency;
  • decide at what stage of the arbitration and in what order any issue(s) will be determined; and
  • dispense with a hearing (Article 14.6).

Even where 'early determination' is not available, most debt claims will be fairly straightforward compared, say, to a breach of contract claim or a force majeure argument. Lengthy hearings and extensive disclosure of documents and evidence production are not required – the key questions are, has the debt fallen due and is there a defence? The expedited procedure holds out the hope that even where 'early determination" is not available, a debt claim can now be disposed of expeditiously.

Electronic communications

The new LCIA rules also confirm the primacy of electronic communications. For example, Requests for Arbitration must be submitted in electronic form and prior written approval is necessary should the Request be submitted by any other method (Article 4.1). This makes service on debtors easier, particularly if they are peripatetic individuals who are hard to pin down or those actively seeking to avoid service. Almost all have an email address!

Enforceability and Brexit

The enforceability of a judgment or award will always be a foremost consideration for clients, especially so in debt claims.  Awards in international arbitration are enforceable in almost all jurisdictions (including the countries of the EU) by virtue of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Award.  In contrast, the enforcement of English court judgments depends upon the existence of international treaties and local law.

In relation to enforcement of court judgments in the EU, while the UK was a Member State, the Judgments Regulation [4] provided that English court judgments could be enforced within the EU as if they were judgments of the relevant Member State in which enforcement was sought. However, Brexit has created significant uncertainties. When the Withdrawal Agreement ends on 31 December 2020, the UK will drop out of the EU's jurisdiction and enforcement regime, and litigants with EU-related disputes may have to fall back on national laws and procedures to enforce their rights there. Only proceedings commenced in the UK before 2021 will continue to benefit from EU jurisdiction and enforcement rules.[5]

This inevitably creates a great deal of uncertainty and in circumstances where a party has a choice between litigating and arbitrating, there will be an increased willingness to choose arbitration over litigation, which provides greater ease and clarity from an enforcement perspective.

Tipping the balance?

Whilst there are other important factors to bear in mind when deciding between litigating and arbitrating, in many cases the availability of early determination and expedited procedure in new LCIA rules, as well as the ease of enforcement of an arbitral award, may tip the balance in favour of arbitration. This added flexibility, coupled with the funded claims portfolio model, provides companies who are battling the economic effects of COVID and Brexit with powerful tools to maximise and protect their cash flows, even where debtors are based overseas.

 

[1] See here an article  in which we look at the main ways in which the new rules differ from the old.

[2] SIAC 2016 Rules

[3] HKIAC 2018 Rules

[4] Regulation (EU) No 1215/2012

[5] Reform of the English Courts - The challenges by David Leckie and David Bennet

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