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Out-Law Analysis 5 min. read

Experts identify 'growing appetite' for international arbitration in the technology sector

FOCUS: There is a growing appetite for international arbitration in the technology sector and this trend is likely to continue.

IT is increasingly important to businesses across the globe and organisations are becoming more and more reliant on technology and technology service providers to help them operate more efficiently and to deliver innovative new services to customers.

However, resolving technology disputes when outsourcing arrangements turns sour can be expensive and time consuming. Arbitration can offer businesses an attractive alternative to the court process and we see international arbitrations increasing in popularity as the technology market in Africa matures.

The growth in popularity of international arbitration for resolving IT and technology disputes

The use of international arbitration to resolve IT and technology disputes is increasing. This is something we have noted in practice and is consistent with statistics released on behalf of arbitral institutions.

In recent years, for example, telecommunications and information technology disputes account for about 10% of all International Chamber of Commerce (ICC) filings. The figures are based on the ICC's own published statistics for between 2009 and 2014 and broadly compare with the number of financial services disputes being resolved by the ICC International Court of Arbitration. Construction-related disputes are still the most common cases to come before the ICC at between 15-20% of all filings. Energy sector arbitrations account for between 10-15% of the filings.

One of the biggest drivers for the use of arbitration in technology disputes is the increasingly international nature of technology-related transactions, whether this is because the customer operates across multiple jurisdictions, the suppliers involved are established or parented overseas, or foreign money is being invested as part of the arrangements.

Speed and cost of dispute resolution are of primary importance to businesses

The speed and cost of resolving a dispute remain two of the main considerations businesses make when assessing which form of dispute resolution to select. A survey on dispute resolution for technology transactions carried out in March 2013 by the World Intellectual Property Organisation highlighted the cost businesses can expect to incur when in technology litigations.

According to the survey, parties in dispute estimated that litigation in their home jurisdiction cost about $475,000 and resulted in a three year legal process. Litigating in another jurisdiction cost approximately $850,000, according to the findings, and take about three and three and a half years to complete.

Conversely, respondents to the survey estimated that arbitration took on average slightly more than one year and cost around $400,000. As these views suggest, some parties continue to see arbitration as cheaper and quicker. In our experience, however – and particularly in a UK context – it is not clear that this is necessarily the case.

The speed of settling a dispute is a major consideration for a party to any commercial dispute, but particularly so for the technology sector. By its very nature, technology is fast moving. What was once the future can rapidly become obsolete. Product development and innovation are integral to the very fabric of a technology company. Becoming embroiled in a long, drawn out dispute diverts attention, occupies management and distracts the operational teams.

A forum, such as arbitration, which produces a certain result in a manner that is perceived to be quicker and cheaper will always be an attractive proposition. In arbitration, the parties typically have greater control over the timetable and the procedure that is followed than in traditional litigation.

For example, the parties tend to have more flexibility to determine the extent of their disclosure or discovery exercises, which, in the case of a major IT programme, can represent millions of documents. However, whether this makes the process quicker will depend on the nature of the case. In our experience complex technology disputes take time to progress through dispute resolution processes, whether that is in arbitration or litigation.

The need for expertise

Resolving complex disputes requires a great deal of expertise.

Research conducted into international arbitration in 2013 by PwC and Queen Mary University of London School of International Arbitration (32-page / 1.27MB PDF) found that businesses involved in energy and construction disputes have disproportionately favoured arbitration compared to financial services companies, which have preferred to take disputes to the courts.

Construction and energy firms benefit from the ability to appoint specialist arbitrators with expertise. The same attraction applies to tech disputes, although in reality it can be a challenge to identify suitable experts to arbitrate that are neither unavailable nor conflicted in some way. Technology still remains a relatively niche sector with a limited pool of experts to select from.

Further, it is not common for institutions to make publicly available a list of arbitrators with set experience prior to a notice of dispute being issued. Perhaps it is time for technology legal fora to identify lists of international arbitrators experienced in technology disputes, of differing nationalities? The efforts of the Silicon Valley Arbitration and Mediation Center are possibly the closest such effort, although the list appears to be by no means comprehensive, and the institution is not a key international dispute resolution centre.

Following the court process has similar risks. We are spoiled in the English jurisdiction because we have the Technology and Construction Court division of the High Court, where the judges are experienced in dealing with technology-related matters. However, this is a unique position not available in other jurisdictions. There is therefore an increased risk in some countries of judges being allocated to resolve disputes even though they have little or no experience in the tech sector.

More fundamentally, whilst parties in a tech dispute might be happy to proceed with court action in the UK where they are each from the UK, concerns about neutrality, or lack of, may dissuade non-UK parties from taking advantage of the UK as a jurisdiction for resolving technology disputes.

The perceived neutrality of the tribunal, the fairness of the process, and crucially, the ability to enforce an award in most foreign jurisdictions, pursuant to the New York Convention, will be important reasons in favour of selecting international arbitration.

Confidentiality of proceedings

The private nature of arbitration is a trait that might also be attractive to businesses involved in technology disputes. Trade secrets and technological know-how are crucial for many tech companies to gaining and retaining a competitive edge. However, confidentiality can be lost, at least in part, in any arbitration. This could include during enforcement proceedings or challenges and appeals to set aside an award.

Africa to drive growth in international arbitration in the tech sector

Technology is perhaps the epitome of a global industry. All sophisticated modern businesses rely on technology to function. There is a global market for the provision of IT services, and for the support of systems. Technology companies in turn rely upon international contracts for supply chain, distribution, installation, support and licensing.

Economic growth in developing countries is helping to fuel growing demand for technology, with Africa a great illustration of this. This is likely to have a knock-on effect on the demand for international arbitration.

In recent years African representation in international arbitration generally has increased significantly. For example, in the past five years the number of ICC filings for Africa has continued to increase annually, both in terms of number of filings and number of countries represented.

Whether a reasonable perception or not, businesses might doubt the maturity of some foreign jurisdictions to satisfactory handle and resolve complex disputes, for example for cross border tech transactions in Africa. As the continent, particularly sub-Saharan Africa, continues to embrace technology we predict that the number of arbitrations related to technology will continue to grow.

David McIlwaine and Stuart Davey are experts in IT contracts dispute resolution at Pinsent Masons, the law firm behind Out-Law.com. A version of this article was first published by Lexis Nexis.

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