Ius Gentium

University of Baltimore School of Law's Center for International and Comparative Law Fellows discuss international and comparative legal issues

The Double-Edged Sword in the Stone: London’s Fate as a Seat of International Arbitration Post-Brexit

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Esther-Jane Grenness

Her chest tightened and her palms began to sweat when an email popped up in her inbox with the subject line, “Attention HSBC London Employees.” Her worst fears were confirmed. Her job was moving to Paris as “preemptive action” in response to Brexit uncertainties.[1] She picked up her phone and dialed her father’s number. A Welsh collier who eagerly voted “Yes!” to leave the EU, he picked up the phone, happy to see his daughter calling. Without even saying hello, she blurted, “Thanks a lot, Da! My job’s to move to France because you an’ all voted to give them the boot.” Tears welled up in her eyes. After a moment’s pause, her father exclaimed, “Bloody foreign loving bastards! Shame on them. They’re a British bank.” Dejected, she mumbled, “It’s all because of Brexit.”

Brexit is the term used to describe the United Kingdom’s June 2016 referendum in which 51.9% of the eligible electorate voted to leave the European Union.[2] Not expecting it to actually happen, the United Kingdom must now decide how, and when, to trigger Article 50 of the Treaty on the Functioning of the European Union (TFEU – or Lisbon Treaty). Article 50 gives the U.K. two years in which to negotiate its exit, but the legislation that links the U.K. and EU is exceedingly complex. Not surprisingly, experts argue it could take ten years to unravel legal ties going back 45 years to the enactment of the European Communities Act of 1972.[3]

The Razor Edge

There is no doubt that Brexit has the British financial markets in turmoil. In addition to HSBC’s dash for the door, VTB Bank, a Russian bank, announced recently that it will also relocate due to Brexit.[4] Moves like this highlight the depth of the Brexit sword’s cut. London is a major player in the financial clearing sector, which is where banks act as intermediaries in business transactions.[5] As a member of the EU, the U.K. enjoys what is known as passporting, which allows the free flow of funds between countries in the European Economic Area (EEA).[6] Without such a free flow, additional regulatory authorizations would be necessary.[7] Brexit strips the U.K. of these EU benefits and leaves the U.K.’s financial market clout teetering on the edge of a sea of quicksand. And it’s not just the free flow of money that’s implicated in Brexit. The heretofore mobile workforce with expertise in “complex and multi-jurisdictional matters”[8] will be curtailed. British lawyers who are currently allowed to “provide interstate services on a temporary basis” in EU member states could lose that right if Brexit goes through.[9] Indeed, experts argue London could lose as many as 18,000 jobs in the legal and accounting services sector, and 83,000 total jobs over the next seven years as a direct result of Brexit.[10]

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The Blunt Edge

Where does this financial sector flight leave the international arbitration business in London? According to a 2015 survey, London is one of the most popular seats of international arbitration.[11] British law is also among the most widely chosen law to govern international commercial contracts—whether or not the contract was formed, performed, or even remotely related to Britain.[12] With such a top spot, the U.K. understandably doesn’t want to lose its primacy to competing international arbitration seats such as Paris, Dubai, Singapore, Hong Kong, Geneva, New York, Zurich, and Stockholm.”[13]

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Most writers on the subject believe London’s primacy as a seat for international arbitration will chug along “business as usual.”[14] There are two major reasons. First, EU law doesn’t govern arbitral awards. Rather, any awards granted in London are governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. This Convention allows parties to enforce arbitral awards in the domestic courts of any of its 156 member states. Second, the U.K.’s Arbitration Act of 1996 is very friendly to arbitration. Britain’s courts take a largely hands off approach but will step in to assist arbitral tribunals with such things as compelling witnesses to testify, preserving evidence, and ordering injunctive relief.[15]

Other arguments posed are that because the U.K. would no longer be bound by rulings from the Court of Justice of the European Union (CJEU), any precedent considered harmful to arbitration could be cast aside.[16] They argue further that in the field of investor-state arbitration, Brexit has its perks. After Brexit, the U.K. would not be bound by the EU’s recent move away from investor-state dispute settlement (ISDS) to an untested investment court system (ICS). Under the current ISDS model, investors are allowed a voice in choosing the arbitrators that will hear their case. Under the EU’s new ICS model, investors would no longer have a voice in arbitrator selection. Only member states would manage the names on a revolving roster of randomly appointed arbitrators. In a post-Brexit world, investors could continue to cherry pick from the various investment treaties to which the U.K. is a party in its own right. Investors could also happily anticipate the new investment treaties the U.K. would now be free to negotiate on its own behalf.

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Given these sunny predictions, one quickly nods one’s head in agreement with such common sense arguments. The sword is still in the stone, however. More recent studies have pointed out that the proponents of these arguments are largely U.K. centered practitioners, who are naturally biased in favor of keeping London at the top of the list.[17] In addition, optimists downplayed the significance of the financial sector’s flight. Even the most myopic commentators had to acknowledge London’s primacy as a seat of arbitration is “undeniably influenced by its role as an international business hub,” but they were quick to soften the potential “knock-on effect” as “expected to be minimal.”[18] A more realistic prediction for this blunt side of the sword is that an “exodus of businesses” would eviscerate London’s status as the financial hub in Europe.[19] Therefore, if London lost its status “and something else becomes the financial center of Europe, over time you may see arbitration gravitate that way.”[20]

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As a British national living abroad, I wasn’t eligible to participate in the U.K. referendum. I wish I could say I agree with the optimists, but the writing is on the wall. Most of the financial sector jobs are moving to Paris.[21] Because Paris is one of London’s competitors for international arbitration market share, it’s only a matter of time before the arbitration business bleeds out of London. The people of Britain have their hands on both edges of the Brexit sword, but as they pull it out of the stone, London’s international arbitration market is likely to wind up cut just as deeply as that of its financial sector.

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Esther-Jane Grenness is an evening student in her fourth year of studies at the University of Baltimore School of Law. She graduated from the University of Baltimore in 2013 with a Bachelor of Arts in Jurisprudence and obtained her Associate of Arts from Howard Community College in 2001. Esther is a member of the International Arbitration Committee’s Investment Treaty Working Group of the American Bar Association’s Section of International Law. She also participated in the Mentorship program with the Women in International Law Interest Group of the American Society of International Law. In addition to her studies, Esther coordinates government procurement contracts in the mobility sales operations group for AT&T’s Global Business – Public Sector Solutions segment.

 

[1] Chris Johnson, HSBC Prepares to move 1,000 U.K. Jobs to Paris Due to Brexit Confusion, Law.com (Jan. 11, 2017), http://www.law.com/sites/almstaff/2017/01/11/hsbc-prepares-to-move-1000-u-k-jobs-to-paris-due-to-brexit-confusion/?et=editorial&bu=Law.com&cn=20170111&src=EMC-Email&pt=ALM%20Morning%20Minute&slreturn=20170021202538.

[2] King & Wood Mallesons, Brexit and Arbitration: Shaken but not Stirred, KWM News & Insights (Sept. 15, 2016), http://www.kwm.com/en/knowledge/insights/the-impact-of-brexit-on-international-arbitration-20160915.

[3] Caroline Simson, What Brexit Could Mean for International Arbitration, Law360 (Jun. 22, 2016, 5:22 PM EDT), https://www.law360.com/articles/808801/what-brexit-could-mean-for-international-arbitration.

[4] Chris Johnson, EY Report: Brexit Could Cost London 18,000 Legal, Accounting Jobs, The Am Law Daily (Nov. 14, 2016), http://www.americanlawyer.com/id=1202772254983/EY-Report-Brexit-Could-Cost-London-18000-Legal-Accounting-Jobs?mcode=1202617075486&curindex=0&curpage=ALL&slreturn=20170021203506.

[5] Clearing, Investopedia, http://www.investopedia.com/terms/c/clearing.asp (last visited Jan. 20, 2017).

[6] What is Passporting? Definition and Meaning, Market Business News, http:/marketbusinessnews.com/financial-glossary/passporting-definition-meaning/ (last visited Jan. 20, 2017).

[7] Id.

[8] James Rogers, Simon Goodall and Charles Golsong, How will Brexit impact arbitration in England and Wales? It’s Business As Usual, Norton Rose Fulbright, 16 (Sep. 25, 2016), http://www.nortonrosefulbright.com/files/international-arbitration-report-issue-7-142408.pdf.

[9] Caroline Simson, Post-Brexit Barriers Could Hurt London Arbitration: Study, Law360 (December 15, 2016, 5:18 PM EST), https://www.law360.com/articles/872676/post-brexit-barriers-could-hurt-london-arbitration-study.

[10] Chris Johnson, EY Report: Brexit Could Cost London 18,000 Legal, Accounting Jobs, The Am Law Daily (Nov. 14, 2016), http://www.americanlawyer.com/id=1202772254983/EY-Report-Brexit-Could-Cost-London-18000-Legal-Accounting-Jobs?mcode=1202617075486&curindex=0&curpage=ALL&slreturn=20170021203506.

[11] Caroline Simson, Post-Brexit Barriers Could Hurt London Arbitration: Study, Law360 (December 15, 2016, 5:18 PM EST), https://www.law360.com/articles/872676/post-brexit-barriers-could-hurt-london-arbitration-study.

[12] James Rogers, Simon Goodall and Charles Golsong, How will Brexit impact arbitration in England and Wales? It’s Business As Usual, Norton Rose Fulbright, 16 (Sep. 25, 2016), http://www.nortonrosefulbright.com/files/international-arbitration-report-issue-7-142408.pdf

[13] Caroline Simson, Post-Brexit Barriers Could Hurt London Arbitration: Study, Law360 (December 15, 2016, 5:18 PM EST), https://www.law360.com/articles/872676/post-brexit-barriers-could-hurt-london-arbitration-study.

[14] James Rogers, Simon Goodall and Charles Golsong, How will Brexit impact arbitration in England and Wales? It’s Business As Usual, Norton Rose Fulbright, 15 (Sep. 25, 2016), http://www.nortonrosefulbright.com/files/international-arbitration-report-issue-7-142408.pdf

[15] James Rogers, Simon Goodall and Charles Golsong, How will Brexit impact arbitration in England and Wales? It’s Business As Usual, Norton Rose Fulbright, 16 (Sep. 25, 2016), http://www.nortonrosefulbright.com/files/international-arbitration-report-issue-7-142408.pdf

[16] King & Wood Mallesons, Brexit and Arbitration: Shaken but not Stirred, KWM News & Insights (Sept. 15, 2016), http://www.kwm.com/en/knowledge/insights/the-impact-of-brexit-on-international-arbitration-20160915.

[17] Maxi Scherer and Johannes Koepp, Consequences of “Brexit” on International Dispute Resolution: Special Issue of Journal of International Arbitration, Kluwer Arbitration Blog, (Oct. 21, 2016), http://kluwerarbitrationblog.com/2016/10/21/consequences-brexit-international-dispute-resolution-special-issue-journal-international-arbitration/.

[18] James Rogers, Simon Goodall and Charles Golsong, How will Brexit impact arbitration in England and Wales? It’s Business As Usual, Norton Rose Fulbright, 18 (Sep. 25, 2016), http://www.nortonrosefulbright.com/files/international-arbitration-report-issue-7-142408.pdf

[19] Caroline Simson, What Brexit Could Mean for International Arbitration, Law360 (Jun. 22, 2016, 5:22 PM EDT), https://www.law360.com/articles/808801/what-brexit-could-mean-for-international-arbitration.

[20] Id.

[21] Chris Johnson, HSBC Prepares to move 1,000 U.K. Jobs to Paris Due to Brexit Confusion, Law.com (Jan. 11, 2017), http://www.law.com/sites/almstaff/2017/01/11/hsbc-prepares-to-move-1000-u-k-jobs-to-paris-due-to-brexit-confusion/?et=editorial&bu=Law.com&cn=20170111&src=EMC-Email&pt=ALM%20Morning%20Minute&slreturn=20170021202538.

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Author: Ius Gentium

Ius Gentium is a legal forum for the University of Baltimore School of Law's Center for International and Comparative Law Fellows to write on and discuss international and comparative legal issues.

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