Arbitration – too much for SMEs?

Back in law school some twenty years ago, the pros and cons of arbitration featured heavily in my dispute resolution syllabus.

I was taught that the key benefits were confidentiality and the ease of enforcement of an award around the world, which still hold true today. I also learned that arbitration was quicker and less expensive than High Court litigation and so it was accessible to parties with smaller, less complex claims and a more limited budget. Over the years, these particular advantages appear to have been eroded, big business has favoured arbitration to resolve large, complex disputes and as a result the costs of arbitration have risen exponentially and as parties strive to appoint well known arbitrators or former judges, justice is less swift as hearings are fixed with reference to very full diaries. This has left many at the helm of SMEs wondering whether it is worth pursuing an arbitration claim for less than £1million.

Cost and expediency

However, arbitration can favour the resolution of smaller disputes. A claim worth £200,000 in the High Court requires an issue fee of £10,000 (plus additional fees for applications etc), in the London Court of Arbitration (LCIA) the registration fee is £1,950. There are ongoing costs of an arbitration, such as administration fees and payment to the member(s) of the Tribunal. These can be reduced by the parties agreeing to a sole arbitrator (as opposed to three persons), not necessarily a lawyer who typically command higher hourly rates, but an arbiter with the relevant technical experience to handle the dispute at a lower rate typical to her industry/sector. International arbitration rules also tend to allow for costs recovery from the unsuccessful party, which acts as a deterrent for frivolous or vexatious claims, or delay tactics. Importantly, arbitration provides flexibility over the timetable, disclosure, evidence and whether and where hearings even need to take place. Post-pandemic many hearings are held virtually so there is no requirement for the parties to travel long distances and lose precious time work time. It can encourage a swift settlement such that the costs referred to need not be incurred. This ability to tailor or expedite the dispute process is a significant advantage over the less flexible court system and can save considerable time and cost for the parties involved.

Tech, arbitration, and a brave new world

The UK is a global tech and fintech hub and as of 2022, London had more fintech companies than anywhere else in the world. The adoption and use of digital assets continues to accelerate around the world. However, recent events, including the onset of the crypto winter and the collapse of the cryptocurrency exchange FTX, have highlighted the vulnerabilities of the industry. This combination of the turbulence in cryptocurrency markets, the increased use of blockchain technology beyond currency and tokens and the rise in fintech applications mean that we expect to see a rise in digital disputes. Arbitration is inherently well suited to settle disputes in this sphere.

Whilst established arbitration rules, can be used for tech, fintech and digital asset disputes, different jurisdictions have seen the emergence of new arbitral rules dedicated to digital asset disputes, such as the Digital Dispute Resolution Rules (‘DDRR’) published by the UK Jurisdiction Taskforce of the Lawtech Delivery Panel (‘UKJT’) in 2021. The rules are intended to be used for disputes involving “cryptoassets, cryptocurrency, smart contracts, distributed ledger technology and fintech applications”. Key innovative features of the DDRR include:

  • A simple procedure with gaps that are intended to be filled by the Arbitration Act 1996 and/or by the parties, and a default rapid 30-day process
  • The parties can, by agreement, remain anonymous from one another and only disclose their identities to the arbitrator
  • Expert arbitrators are appointed by the Society for Computers and Law
  • The parties may be required to handover their private keys and the arbitrator is given power to make changes directly to the blockchain, meaning they can enforce their decision almost immediately
  • It is possible for a legally binding resolution to be selected by an artificial intelligence agent, with the decision implemented directly within the digital asset system

The overarching aim of the DDRR is to provide rapid, cost effective and resolution of specialised tech disputes. Depending on the type of dispute, commercial parties can avoid or limit the use of lawyers. Parties must elect to adopt these rules, and like with any arbitral rules, the parties that reap the rewards are those willing to cooperate with the process.

In short, arbitration is what the parties make of it. Of course, as in any type of dispute resolution, if you have the misfortune of a difficult and recalcitrant opponent, increased costs and delay may be inevitable.

By Lydia Danon, Partner and Florence Sandberg, Associate at Cooke, Young and Keidan