There is a price war raging in the London arbitration market that has led law firm leaders to question their commitment to the practice. Is the bubble bursting?
Arbitration was a practice area until recently seen by many managing partners as reliably high margin and partner-driven but for how much longer? According to a growing number of industry veterans, a softening arbitration market has resulted in a spate of lowballing, particularly in London. While the average legal cost of arbitration at the International Centre for Settlement of Investment Disputes (ICSID) stands at $4.5m, according to a 2014 report by Allen & Overy, some advisers are winning work by promising to run the entire case for less than a tenth of that sum. While such claims are anecdotal, the Lebanese government recently released pitch information that showed 11 international law firms had pitched between $350,000 and $1m to defend it against an ICSID claim. The lowest bidder, Paris-based Bredin Prat, won the instruction.
‘Lowballing is rife,’ says London-based Stephen Jagusch QC, chair of Quinn Emanuel Urquhart & Sullivan’s international arbitration group and opposing counsel to Bredin Prat on that case, acting for Imperial Jet in a claim stemming from Lebanon’s scrapping of aviation licences. ‘Firms are prepared to take on a case as a loss leader – sometimes for no fee – or on capped or fixed fees that are frankly ludicrous.’
He adds that such tactics can see firms doing ‘six months work, choosing the arbitrators and doing the first procedural meetings to entrench themselves as the client’s counsel’ before ‘holding the client to ransom’ by demanding more fees before crucial stages in the case.
‘Competitiveness has increased. You’ve got lots of lawyers doing arbitration and some of them are willing to lowball.’
Constantine Partasides QC, Three Crowns
While international arbitration became a cornerstone of US law firm expansion in London during the 2000s and one of the few practices where Magic Circle firms would still make laterals in their backyard, its shine has dimmed over the last 18 months with these billing practices reflective of a less profitable landscape.
Supply and demand appears to be the main culprit. ‘For a decade or so it was like an oligopoly, as there were only a few people in the game,’ says Jagusch. ‘There wasn’t price competition. Now every man and his dog claims to have an arbitration practice, and because there’s been such explosive growth in arbitration there [have] been enough cases for everyone to get a CV. The increased competition means more law firms are being invited to pitch for cases and it’s difficult for firms to differentiate themselves. There are firms like us and others who have genuine credentials, but how do GCs know that? They see 20 different guys in suits and everyone has done at least one London Court of International Arbitration (LCIA) case.’
Too many men
The dispersal of talent in London has certainly contributed to a more competitive environment. Practices which had long dominated the market, such as Freshfields Bruckhaus Deringer and Wilmer Cutler Pickering Hale and Dorr (WilmerHale), have seen star names decamp, in some cases to become serious rivals. In the case of Freshfields, high-profile trio Constantine Partasides QC in London, Georgios Petrochilos in Paris and arbitration doyen Jan Paulsson left in April 2014 to found Three Crowns. They were joined by three other significant names: Covington & Burling’s London-based Gaëtan Verhoosel, Shearman & Sterling’s Paris-based Todd Wetmore and Jones Day’s Washington DC-based Luke Sobota. For WilmerHale, a dominant force under the leadership of the enigmatic Gary Born, the exit of Wendy Miles QC to Boies, Schiller & Flexner at the end of 2014 created another new entrant to the London market.
Will finance ever learn to love arbitration?
Financial services companies have typically avoided arbitration in favour of court systems that offer binding precedent but practitioners are ever-hopeful of attracting some of the world’s top companies to the cause.
Efforts to grow the arbitration sector by marketing disputes mechanisms to banks have been as frequent as they have unsuccessful. A high-profile push by Prime Finance, which was launched to great fanfare in 2012 by the founder of Allen & Overy’s US law practice, Jeffrey Golden, has failed to gain much traction.
One notable shift, however, came in 2013 when the International Swaps and Derivatives Association (ISDA) introduced six model arbitration clauses into its master agreements for over-the-counter derivatives transactions. (Previous agreements provided for jurisdiction of the English or New York courts.)
Law firms with large financial services client bases are also reporting a rise in arbitration clauses being written into contracts. Jayne Bentham, an arbitration partner at Simmons & Simmons, notes: ‘We are getting more enquiries from banking and hedge fund clients about how to tailor clauses in their contracts, when historically they were all court clauses. It will take a while for those to filter through to disputes… but as the banks go more into places like Africa and Asia, they are having to change the way they do their contracts.’
While evidence of a swing towards arbitration is mainly anecdotal, some arbitrators cite a change in mindset among banking general counsel. Audley Sheppard QC, co-head of international arbitration at Clifford Chance (CC), comments: ‘As you get outside Brussels regulation territory then arbitration becomes the norm. Private equity houses are relatively open to arbitration, but they will rarely bring a dispute as it takes away profit and time for them so they will go a long way to avoid getting into a dispute.’ Marie Berard, an arbitration partner at CC, adds: ‘Banks have had their fingers burned with all of the mis-selling claims damaging their reputations so the idea of having their dirty laundry dealt with behind closed doors is appealing to them. It’s not as prevalent yet as in the oil and gas industry but it’s on the right track.’
But just as soon as arbitration has made gains as a destination for financial services disputes, London has battled back, with the launch of a special court for banks at the end of last year (see The Commercial Litigation Summit 2016: Marked to market). The Financial List, which has already had over 40 disputes referred into it, has financial services specialists as judges and introduced a market test mechanism designed to provide precedent without the need for a full-blown dispute.
While arbitration has sought to make up ground in financial services, it has a long way to go before it has persuaded banks that confidentiality is more valuable than reliable and sector-specific judges in the English courts.
The boutique phenomenon in London, which began in litigation as a response to the flood of financial disputes work that larger law firms were largely conflicted out of, further widened the talent pool and then gave birth to a string of arbitration specialists. A notable example was the Mayfair-based Volterra Fietta. Formed by Latham & Watkins duo Robert Volterra and Stephen Fietta in 2011, a parting of ways recently led Fietta to start his second arbitration-only boutique, Fietta.
‘Competitiveness has increased,’ agrees Partasides. ‘You’ve got lots of lawyers doing arbitration across many firms and some of them are willing to lowball. We were recently retained in some investment treaty cases against a European state and in one of the pitching processes a long-established firm – not one of the aspirational firms – went into the tender offering a 100% contingency. They didn’t get the case as the client thought that wasn’t a healthy way to structure the representation of a significant claim for them. We were surprised, nonetheless, as it’s the kind of proposal you’d only make if you were struggling so it’s an indication some of the established names are not getting the pipeline of cases the market expects.’
While the likes of Boies Schiller, Three Crowns and Quinn Emanuel, which four years ago recruited Jagusch and Anthony Sinclair from A&O, have come in at the top of the market there are also a host of London-only boutiques that entered the market with lower-cost models. This group, which includes the likes of Cooke, Young & Keidan (CYK), Humphries Kerstetter and Enyo Law, have kept overheads and hourly rates lower than large City players. Fees typically range from between £300 and £500 per hour for partners, with CYK founder Philip Young noting that his fee would be ‘about double’ that range at his former home, Baker & McKenzie. ‘We’re not a Skadden Arps with lots of costs on the balance sheet. We are lean and slim and efficient and therefore we operate a model where we charge less than other people because we maintain our margins,’ says Young. ‘As a consequence, we attract arbitration that would otherwise go elsewhere.’
‘There are firms like us and others who have genuine credentials, but how do GCs know that? They see 20 different guys in suits and everyone has done one LCIA case.’
Stephen Jagusch QC, Quinn Emanuel
The rise of the disputes specialist has certainly pushed down on fees, with even the elite boutiques known to on occasion take cases on a 100% contingency basis. While this has put pressure on hourly rates, with the most common contingency-based billing slashing hourly rates in return for an uplift in the event of victory, more aggressive contingency billings in exchange for percentages of the winnings can lead to higher profits if used in large enough volumes to create a hedged practice. Jagusch notes: ‘Only one in ten of Quinn Emanuel files globally had a contingent element to it but that 10% of our cases generated nearly a third of our revenue.’
While Big Law partners are quick to criticise new entrants for lowballing, the elite boutiques have performed well financially while running large portfolios of cases. Three Crowns, for example, has expanded to nearly 50 lawyers globally in two years while maintaining a profit margin of over 50%. It counts the likes of ExxonMobil, BP, ConocoPhillips, Occidental Petroleum, American Express and the governments of Bahrain and Chile as clients. At Quinn Emanuel, arbitration has grown to account for around 40% of London revenue, which pegs its income at around £10m. Instead, it is largely the chasing pack that have felt the pressure on fees, with London increasingly viewed as too expensive for bread and butter work that would have previously kept armies of lawyers in the City busy. But no-one has been entirely spared.
Volterra comments: ‘There is a question as to whether Big Law can maintain a cutting edge in arbitration. I’ve seen Magic Circle firms coming into pitches for investor-state cases with blended rates of €200. That’s not sustainable. They will pitch with a London team but then may push it out to low experience and low salary contract workers in Madrid, Rome, Warsaw or Bratislava.’
Not your average Joe, José or Jakob
While Freshfields, along with the likes of Skadden, Arps, Slate, Meagher & Flom and WilmerHale, has largely held the line on rates, London partner Sylvia Noury admits ‘we are not immune from fee pressure’ and is as a result now ‘looking more actively than ever at alternative pricing models, including fixing or capping fees, seeking out third-party funding and cross-border staffing’. Audley Sheppard QC, co-head of international arbitration at Clifford Chance, agrees: ‘I don’t think any firm has carte blanche to say this is our rate and you can like it or lump it. There are very few disputes where people can do that anymore.’
Matthew Saunders, a rare big-name lateral in the London market after joining Ashurst at the start of the year from DLA Piper, where he was head of international arbitration, says that the increasing globalisation of what was already a border-spanning trade is another factor in the pressure on rates, commenting: ‘There is a feeling now that arbitration can be run anywhere so the dispute has to be of a high level to come to London, given the higher cost of running a dispute here.’
While high-stakes work is still finding its way to the elite practices in the City, there is an increasing trend towards bypassing London solicitors. Saunders adds: ‘In the last five years firms in parts of the world where work emerges, like Eastern Europe, have built up their own skill bases and are now largely able to handle the work. In London there is the added element that barristers can be competition and we’ve seen Indian and South African law firms deciding to just go and use a barrister.’
The rise of rival arbitration centres, most notably Singapore, has also put pressure on London. The city state has positioned itself to capture disputes arising out of Indian and Chinese investment overseas that would have otherwise come to London. Trade sanctions imposed on Russia by the European Union and the US have also directed a lucrative flow of work towards Asia for fear that an award made in London would be unenforceable.
‘We are not immune from fee pressure. We are looking more actively than ever at alternative pricing models, including fixing or capping fees.’
Sylvia Noury, Freshfields Bruckhaus Deringer
The number of new cases registered at the Singapore International Arbitration Centre rose by 22% to 271 in 2015, thanks to a rise in outbound investment from Asia-Pacific corporates, and this has created a talent base to rival London at a cheaper cost.
Young says: ‘There have been instances of people going to Singaporean law firms on the basis they still hire an English barrister. That keeps costs down overall. London law is probably a little overpriced at the moment.’
While the number of cases registered at the LCIA also increased last year, up 10% to 326 claims, the shift in how cases are being run – even under LCIA rules – underlines the drive to reduce costs. But long seen as an artisan process, with work largely entrusted to a coterie of prominent names in New York, London and Paris, the sustained boom in arbitration has also put it on the path to commoditisation that has long been a reality for litigation and regulatory work. The consensus among leading practitioners is that contractual disputes have been commoditised, with the proliferation of legal panels assisting in dragging down fees, but Noury says: ‘Companies are understandably wary of suing governments, given concerns about government relations and reputation, so if they are going to do it they are going to do it properly.’
However, the confidentiality of arbitration has meant that even this top-tier, investor-state arbitration has been lowballed because ICSID is the only institution where cases are public and so act as a sandwich board for further instructions.
Volterra reflects: ‘The reason so many lawyers want to do investment treaty arbitration is to be able to say: “I have no proof of the 500 LCIA cases I claim to have done – but you can see I’ve got this ICSID one.” People will pitch low to get a BIT case so that, once on the CV, they go with that CV and try to leverage that one case to get higher fees.’
The self-created price war between arbitration lawyers in London is now facing pressure on the buy side, with energy clients, long the bedrock of lucrative arbitration practices, reducing their legal spend.
International arbitration was one of the first priorities for US law firms building European networks and one of the few practice areas Magic Circle firms would make lateral hires in. While arbitration continues to attract investment, with Latham landing rising star Sophie Lamb from Debevoise & Plimpton in June and Linklaters hiring Matthew Weiniger QC last summer, white-collar crime and government investigations practices have usurped arbitration as the hottest investment prospect for Big Law.
For Partasides, it is a more natural fit, with many clients now only willing to pay London rates for high-stakes disputes.
‘It will be interesting to see if firms who depend on a high-leverage model will start de-prioritising investment in the arbitration space and instead prioritise investment in areas such as financial investigations, in which it is easier to staff large teams of 20 or 30 lawyers.’
Optimistic practitioners are hoping a market correction and some retrenchment from the firms that flocked to arbitration in the last five years will see some recovery in rates but a larger group see that as wishful thinking. It seems the arbitration veterans will just have to get used to the cold winds of competition.
tom.moore@legalease.co.uk