LECTURE: The AIFC Court and the Common Law Method of Resolving Commercial Disputes and Issues arising from Regulatory Decisions
The Rt. Hon. Sir Jack Beatson FBA, Justice of the AIFC Court
Delivered at the Supreme Court of the Republic of Kazakhstan
on Tuesday 24 April 2018
(1) It is a huge honour and a great pleasure to be asked to speak here at the Republic of Kazakhstan’s Supreme Court in the presence of Chief Justice Assanov, other judges of the Supreme Court, with regional judges joining us by videolink, Lord Woolf, the Chief Justice of the AIFC Court, Barbara Dohmann QC, Chairman of the AIFC’s international Arbitration Centre, Kairat Kelimbetov, the Governor of the AIFC and other members of the team which has worked so hard to set up the Court, in particular the Court’s Registrar and Chief Executive, Christopher Campbell-Holt, who is based in Astana.
(2) My topic is the nature of the common law method and how it will work in the context of an international financial centre such as the AIFC. Consideration of the common law method has two distinct elements. The first concerns the law itself. The second concerns the judges who created so much of the common law over the centuries. I suggest that there will be at least seven features of the common law method which will make a substantial contribution to dispute resolution in the AIFC. I will say something brief about each of them. They are:
· A proven track record and proven foundational principles relevant to commercial and regulatory law which have proved attractive to the international business community for over 100 years;
· An independent judiciary committed to the rule of law who are appointed as judges after significant practical experience as lawyers;
· The decisions of common law judges are sources of law which are binding precedents for decision-making in later cases on the same question so that parties and their advisers know where they stand and are able to predict the outcome of any disputes when they arise;
· Flexibility which enables a common law system to develop principle incrementally and keep up to date without producing uncertainty;
· Procedural rules which foster predictability and enable cases to be dealt with in a way that is proportionate to their complexity;
· Considerable experience of commercial arbitration and respect for the parties’ choice of arbitration shown by a “light touch” system of supervision guided by a general principle of non-intervention; and
· A developed body of principles and decisions on the supervision by judicial review of decisions of commercial regulatory bodies.
(3) Before turning to the seven features, I briefly set out the legal framework within which the AIFC Court will work. Article 13(2) of the AIFC’s Constitutional Statute (the “Constitutional Statute”) states that the court is an independent court and not part of the judicial system of Kazakhstan. The court is to serve the AIFC by dealing with all disputes which arise out the AIFC or its operation; that is disputes between AIFC participants, and between participants and AIFC bodies and the foreign employees of participants. But the court will also have jurisdiction in respect of other disputes concerning other markets which all parties agree to have dealt with by it.
(4) The AIFC Court Regulations (“the Regulations”) make provision for the complete independence of the AIFC Court’s judges when performing their judicial functions and require them to act impartially when doing so.
(5) Article 13(5) of the Constitutional Statute provides that the law to be applied is to be based on English law principles and legislation and the standards of leading global financial centres. Regulation 29(3) of the AIFC Court Regulations (“the Regulations”) provides that the Court will be guided by its own decisions on relevant matters and by final decisions in other common law jurisdictions. It thus has similar features to other institutions of what can be described as a transnational system of dispute resolution such as the DIFC, the Dubai International Financial Centre Courts and the SICC, the Singapore International Commercial Court. Such courts also form part of a complementary partnership between dispute resolution based on litigation and that based on arbitration.
2. The 7 features resulting from the AIFC being based on and guided by principles of English common law and legislation
(1) A proven track record and proven foundational principles relevant to commercial and regulatory law: My starting point is to say that the English common law, its method of making decisions and keeping the law up to date, and the judges who created so much of the common law over the centuries have a proven track record. A 2016 report stated that 27% of the world’s 320 legal jurisdictions use English common law. The confidence for over 100 years by the international business community in English common law and its judges is also demonstrated by the number of companies and individuals with no or little connection to England who choose to litigate or arbitrate in London. So, in 2015 seventy percent of the London Commercial Court’s work had no relation to England except for the choice of law and choice of jurisdiction clause in the contract. In the year ending in July 2017, 71% of claims in London’s Admiralty and Commercial Courts were international. Why is this?
(2) The first reason is that the principles of English common law balance the tension between the needs of certainty and flexibility in a way which has proved practical and attractive to its international users. I mention three principles that are relevant to the likely workload of the AIFC Court. First, the common law respects the parties’ freedom of contract and the bargain they have struck, and thus in general respects their autonomy to agree the terms of the contractual relationship as they choose. The second, which follows from this is that commercial contracts are construed so as to give effect to the intentions of the parties objectively determined. Provided you contract in reasonably clear and intelligible terms, what you agree is what you get. The objective standard protects those who rely in good faith on the apparent position and thus promotes certainty and finality of transactions. The third principle is that the courts will not imply terms into contracts or rectify their terms unless stringent conditions are met. Other than the relatively rarely applied rule against penalties, English law does not seek to strike down or amend the parties’ agreement. There is no overriding duty of good faith
(3) The United Kingdom has a strong independent judiciary committed to the rule of law: A strong and incorruptible judiciary ensures fair and predictable dispute resolution. International parties litigating in a jurisdiction with such a judiciary can be confident that their disputes will be decided only on their intrinsic merits, without regard to nationality, politics, religion or race. That is a vital factor in inspiring business confidence and underpinning international trade and investment. The judges of the AIFC Court are all the product of such a system, and will bring its values to their work. In the context of the AIFC itself, the commitment to judicial independence and to the rule of law is seen from the provisions in the AIFC’s Constitutional Statute and Regulations to which I have referred.
(4) One of the reasons for the confidence in English law that has been shown by the international business community is that common law judges are appointed after significant practical experience as lawyers. They have therefore had significant interactions over many years with the commercial entities and individuals who they represented or who were their adversaries. That background gives them experience and understanding of the pressures of commercial life, and the need for commercial and financial law to reflect the needs of the business community. It also helps them to understand the differences between acceptable and unacceptable practices. That background has also been an important factor in the adaptability of English common law to fast-changing practical and commercial realities.
(5) In common law systems, decisions of judges are sources of law: The hallmark of a common law system is the importance accorded to the decisions of judges and, in particular appellate judges, as sources of law. So, within a framework set by the legislature when it enacts statutes, the law is made by decisions of judges. The common law is thus that part of the law which it is within the province of the courts themselves to establish. It is unwritten in the sense that it is not in a statute, but it is made accessible and transparent in law reports and in textbooks which analyse the effect of the decisions with a view to identifying the principles which underlie them.
(6) Decisions are binding precedents: The system is built on and depends on individual decisions being binding precedents for future courts at the same level to follow so that “like cases are treated alike” and the principles in a particular area are built up by a gradual development from case to case, in the way I will describe. Two features of the doctrine of precedent which gives binding effect to previous decisions of courts at the same level are crucial to the certainty that the common law produces. The first is its strength. The second is its maturity. Because English law has been determining cases involving international commercial disputes since the early 19th century it has built up a large and formidable body of precedent to assist parties and their advisers to know where they stand and to be able to predict the outcome of any disputes when they arise in many specialist areas such as shipping, commodities, insurance, construction and banking. By contrast, civilian systems are essentially codified legislative systems and owe their inspiration to the principles of the Napoleonic codes. In such systems judicial decisions are not primary sources of law but only a gloss on the law in the legislative code.
(7) This is not to downplay the importance of legislation. Of course, much English commercial law is contained in legislation, from statutes on topics such as Sale of Goods, Bills of Exchange, and Marine Insurance originating in the nineteenth century which reflected market practice and previous decisions on these topics, to modern statutes dealing with company law, banking and the financial markets. But much law is also contained in the decisions of the courts; either “pure” common law where there is no statute involved (a rarity in the modern world), or where the decision interprets the statute or is made against a statutory background which while not directly applicable is relevant to the determination of the underlying principles and the result in the case. While the core of pure common law doctrine continues to shrink, the common law technique will continue as the courts consider and apply the statutory provisions. In the case of the AIFC, its legal framework consists of regulations and rules made in accordance with its Constitutional Statute.
(8) The judges’ duty to apply statutory and common law, the fact that the principles governing the underlying contractual or other dispute are ascertainable, and the importance of the doctrine of precedent are strong factors in the certainty and predictability of English commercial law. Certainty is important in all contexts but particularly important where a transaction or course of dealing may affect third parties, for example involving documentary letters of credit, bills of lading, bearer bonds or long chains of contracts of sale or for services. In such cases there can be difficult choices between the claim of a person who has been wrongfully deprived of property, often fraudulently, and the claim of a third party who has acquired the property in good faith in the market place.
(9) A common law system has flexibility which enables it to develop principle and keep up to date without producing uncertainty: In a nutshell, the common law does this by applying old principles to new circumstances, and by very gradually moving from the particular to the more general in a way which is sensitive to the particular commercial context.
(10) Lord Goff, a distinguished English appeal judge and scholar, stated that the dominant element in the development of English law should be and is “professional reaction to individual fact situations rather than theoretical development of legal principles”. He described the process of legal development within a common law system as a movement from the identification of specific heads of recovery in particular cases to the identification and closer definition of the limits to a generalised right of recovery; a search for principle. This “bottom-up” approach of gradually generalising from the specific is part of the way that judges have exercised their responsibility over the centuries to keep the common law abreast of current social and market conditions and expectations, and the challenge of new technology. In keeping the law up to date, they have also had regard to what is done in other legal systems. Lord Goff saw the developing state of the law as a mosaic that is kaleidoscopic in the sense that it is in a constant state of change in minute particulars. Such development typically takes place in the decisions of appellate rather than first instance courts, and the reference to minute particulars indicates that it is very gradual and dependent on the particular context of the case which is being decided.
(11) Some of the most dramatic examples of such development of the law have happened in areas which are not of relevance to the work the AIFC Court will be doing. But there are also examples of development by our final court of appeal, formerly the House of Lords and now the UK Supreme Court, which is of great importance to commercial law. In 1932 the House of Lords took the specific cases in which a person had been held liable in damages for a civil wrong (a tort) and identified a generable principle of liability focussed on the blameworthiness of the defendant’s conduct which foreseeably caused the harm to those closely and directly affected by the conduct. In 1991 the English final court of appeal rationalised a large number of cases which had appeared to be based on narrow fact-based grounds and recognised the principle of unjust enrichment as the unifying principle underlying liabilities to make restitution of benefits gained by the defendant at the plaintiff’s expense.
(12) Because common law change is incremental and gradual, it is also possible to step back if a particular development turns out to be a step too far. It is the flexibility of the system which keeps it relevant and up to date and able to meet the challenges of an ever-changing commercial world. In recent years English law has been a leader in addressing the problems of globalised financial markets after the global financial crisis in 2008, as seen in the “Waterfall” and other litigation about Lehman Brothers and it has recently had to revisit and determine the duty of banks in identifying fraud in the internal corporate structure of their clients. Last month, Lady Justice Gloster, the Vice-President of the English Court of Appeal, stated that at present the common law is leading the way in Fintech, Digital Ledger Technology and Artificial Intelligence.
(13) Predictability by the application of known and suitable procedures: The procedural rules in the English Civil Procedure Rules are designed to be practical and to deliver the speedy and efficient resolution of business and financial disputes in ways which are proportionate to the nature and complexity of the case. They are sensitive to the unique needs of commercial court users and are generally accepted as being the most effective set of rules to apply in trying complex commercial cases.
(14) I anticipate that the AIFC Court Rules, which are closely modelled on the English Civil Procedure Rules, will provide similar benefits. There is a special fast track procedure for small claims. The common law principle that the costs are generally to be borne by the loser of litigation applies, although there is power for the court to make a different order.
(15) A developed body of principles and decisions on the supervision by judicial review of decisions of regulatory bodies: I have stated that the AIFC court is to have exclusive jurisdiction over disputes between AIFC participants and AIFC bodies. The exact boundaries of that jurisdiction will need to be determined. In this context, however, the experience of the English common law in the exercise of the judicial review jurisdiction over the decisions of regulatory bodies, including those in the financial, banking and commodity markets will, in my view be very helpful. The role of the court has been to ensure by the exercise of a supervisory jurisdiction, that regulatory bodies operate within the area that has been allocated to them by the legislature or other body conferring power on them. The court is concerned with the legality of their decisions, including their rationality and procedural fairness rather than their substantive merits.
(16) While the courts have the final word on questions of law, in considering the other questions, they will take into account the expertise of the decision-maker, and whether the decision requires the evaluation of complex economic or scientific evidence. They will not interfere if the matter is one for the judgment of the administrator or regulator and not for the judgment of the court, and the threshold for a finding of “irrationality” is high. English Courts exercising the supervisory jurisdiction do not substitute their own judgment for that of the administrator or regulator who was tasked with making the decision.
(17) English law has considerable experience of commercial arbitration and respect for the parties’ choice of arbitration: Chief Justice James Allsop of the Federal Court of Australia has said that “co-operation and partnership between courts and arbitral structures is essential for a jurisdiction to serve international commerce, and for judicial and arbitral institutions to complement each other and to grow and succeed”. He also said that how well any particular jurisdiction deals with international commercial arbitration and so serves the international commercial community is dependent upon the quality and qualities of its commercial courts” which, “as supervising seat courts and as enforcing courts, are a critical integer in the successful operation of the international commercial arbitral legal order”.
(18) The legislative framework provided by the English Arbitration Act 1996 and the decisions of courts on it show respect for the parties’ choice of arbitration. English Courts provide support for the process during the arbitration if one party tries to frustrate the arbitration agreement and there is a general principle of non-intervention in arbitral proceedings. The volume of commercial litigation and arbitration in the Commercial Court in London means that English common law has considerable experience of supervising the awards made in commercial arbitrations. Last year, in an important speech in Beijing, Lord Thomas, then Lord Chief Justice of England and Wales, said that when considering a dispute about an arbitration agreement or the arbitration process, courts are required “to ensure that the choice of arbitration and party autonomy are fully respected and not nullified”.
(19) These then are the features of the English common law system which will, in my judgment, make the AIFC Court an effective and independent institution in which its users can have confidence. Confidence by the business community and the international investors in the AIFC in the AIFC Court and the fairness of its processes will play a significant role in ensuring the success of the AIFC.
(20) Thank you.