Law: Arbitration: it's all very hush-hush

The fact that Arthur Andersen and Andersen Consulting are resorting to arbitration to settle their differences is common knowledge. It shouldn't be. Choose arbitration, says Robert Verkaik, and confidentiality comes as part of the deal.

The inability of Arthur Andersen and Andersen Consulting to reach an amicable settlement of their differences has forced them to seek a resolution through international arbitration in Paris.

If the course of this arbitration had run smoothly then no one outside the group would have had an inkling that all was not well with the world's largest professional services provider. Of course, it's now common knowledge that Andersen Consulting's complaints focus on Arthur Andersen's development of a consulting business in direct competition with it.

Experienced arbitrators believe that the Andersen case is an important test of the usefulness of international arbitration as a forum for the settlement of disputes among multinationals.

Strict confidentiality is an essential ingredient of the process. To be able to air all dirty washing in private is one reason so many businesses choose arbitration over litigation.

For this reason, Geoff Prevett, head of arbitration at national law firm Eversheds, contends that the public aspect of the Andersen dispute "rather defeats the purpose" of going to arbitration in the first place.

He says: "It's clearly all very embarrassing for them. However, I doubt whether it leaked out of the court." Any suggestion that the International Chambers of Commerce, the chosen forum for the Andersen arbitration, played even a minor role in the disclosure of sensitive information would deal the ICC's credibility a serious blow.

In recent years arbitration has become an extremely competitive business. London, Paris, Geneva, Stockholm, Singapore and New York are all fighting for larger shares of the international market. It's a market that supports dozens of arbitration courts and hundreds of well-paid arbitrators and lawyers.

Because commerce loathes adverse publicity, Mr Prevett says the public only hears about a fraction of the number of disputes that go to arbitration. This makes it hard to trumpet any success stories.

Over the past 20 years London has been losing its arbitration work to Paris and Geneva. In many instances, even when international contracts are subject to English law, their arbitration clauses name arbitration centres outside the City. More recently, Hong Kong and Singapore have been winning work away from London. As the region's tiger economies start to slide the Far East is expected to become a lucrative source of arbitrations.

As London's cases declined, arbitrators began voicing dismay that London could not capitalise on its market advantages. While Geneva and Stockholm have a reputation for neutrality, they can't compete with the City's legal system. So, to stem this steady flow of arbitration from London, the government introduced the Arbitration Act of 1996.

Says Christopher Newmark, an arbitration partner at international law firm Baker & McKenzie: "London is still viewed very highly and what has maintained London as an arbitration centre is the quality of the lawyers and the arbitrators, as well as the supporting legal system.

"But the English courts were overly intrusive and were getting involved too often, rather than leaving it to the arbitrators and the parties to get on with it."

Mr Prevett argues that London arbitrations had become a "mirror image" of High Court actions, where the burden of discovery made arbitration just as cumbersome and costly as litigation. Some cases ground to a halt when one party, unhappy with the way the arbitration was going, went to court to find a more favourable outcome.

The motivation behind the Act, which has been up and running for exactly a year, was to put London on an even playing field with the other international centres and make arbitration in this country less like going to court. Arbitrators have had their jurisdictions extended while the courts have had theirs curtailed.

The Arbitration Act is now the subject of a number of court cases which will decide whether simple disputes, such as debts owed, need to go to arbitration. Indications suggest the courts are not willing to let companies slip out of arbitration cases just because they reject the other side's contention there is a genuine dispute at stake.

One year on, both lawyers and arbitrators say, it is still too early to gauge whether the Act has helped London to win back the arbitration work it has lost. Many of the contracts which have been negotiated to take advantage of the new Act have not yet given rise to disputes.

The other arbitration centres are fighting back. This year the ICC is marketing new rules it introduced last month in the hope of encouraging people to make Paris their first-choice forum for arbitration. The London Court of International Arbitration has revamped its own rules.

In light of these developments, perhaps the Arthur Andersen executives who drafted the arbitration agreement would do it differently today.

The Arthur Andersen arbitration derives from a clause in the worldwide member agreement which provides for arbitration in the event of an insoluble internal squabble. It also preserves the right of a number of European member firms to select Geneva over Paris as the forum for arbitration. This is proving a significant hitch.

In recognition of the ecomplexity of the Andersen agreement, the ICC has made it clear it will not refer the Andersen Consulting claim to the French arbitration court until each member firm has had time to respond to the ICC and stipulate its preferred choice of venue. The dispute is now unlikely to reach the court before March.

The Andersen dispute has already become public knowledge; now it looks likely to be subject to the two other disadvantages of litigation - high cost and delay. But there is another alternative. Some experts in Alternative Dispute Resolution have questioned whether arbitration was the best way to settle the disagreement. Mediation is a key aspect of ADR.

John Bishop, president of the Official Referees Solicitors Association and senior partner of City law firm Masons, argues that arbitrations still ends with a winner and a loser. He says: "Arbitration does not necessarily help the business to continue to survive after the dispute. ADR is much more about bringing parties together."