Keep the Navy off your yacht!
This article was written by Clem Danin. All views and opinions expressed are strictly his own.
The LME was run by a Board and Committee until restructuring in 1989. Up to that moment, all those elected or appointed to the Committee were immediately members of the Panel of Arbitrators.
It may be a simplification to say that at least 80% of the Committee members would find it difficult to spell ‘arbitrator’, let alone be aware of the responsibilities involved. In those days the LME’s very successful arbitration procedure was simple and effective. The regulations, displayed on the reverse side of every contract, then issued to support each trade, were where the arbitrators acquired their skills.
In simple terms, Company A had a dispute with Company B and they would either each nominate an arbitrator or agree on a single arbitrator from LME Arbitration Panel. The dispute would be resolved, and they would all go out for a good lunch together. Contributing to the success of this arrangement was the first-hand knowledge of the arbitrators and the mutual respect between the parties. The parties usually remained on good terms thereafter. It was quick and it was inexpensive, as arbitration purports to be. As today, lawyers could only be present at hearings with the permission of the tribunal, but then there were no lawyers on the Panel. Today the LME does allow lawyers on the Panel (provided they have some commodity experience) to the extent that now the majority are, indeed, lawyers.
As companies grew and a more international influence arose, so did legal involvement. Companies (including the LME) started employing lawyers. Lawyers, like metal brokers, like to hide behind their own language (functus Officio, ipso facto, joint and several), as do all professions. (Backwardation, Butterfly Option, Cash for a day.) So, they prefer to speak to each other. A combination of this, the Financial services Act with all its regulation, the introduction of the Clearing House and the Arbitration Act of 1996 all resulted in a seismic shift in arbitration.
In the ‘90s, with lawyers becoming more involved, LME arbitrators were obliged to increase their fees from about £70 per hour to about £250 per hour, otherwise they would not be taken seriously. Elsewhere there has been a tendency over recent years for retired judges to become arbitrators. This has inevitably led to the necessity for the employment of expert witnesses. Many of these are side-tracked arbitrators. More and more costs; more and more time.
In Egmatra AG v Marco Trading Corp (QBD)1998 Mr Justice Tuckey ruled the there was no irregularity in the LME arbitrators refusing expert witness evidence. LME arbitrators as such, had the necessary experience.
Again, the incestuousness and mystery of the law outshines the practicality of the trade.
As with some auditors, most lawyers, even those with purported trade experience, do not understand futures markets, and there are some who cannot grasp the concept of selling something one does not own.
And so, with the resultant dramatic increase in costs and certainly time, arbitration has lost a lot of its appeal and disputants now tend to move to the courts where possible, and particularly if there is no LME Arbitration clause in the contract. At least they don’t have to pay the judges.
The situation now established cannot be reversed and as a result there may be an argument in some areas to move to mediation.
Maybe, like a Naval officer on a yacht, the worst thing you can have on an arbitration is a lawyer.