Litigation is the default method of resolving commercial disputes, but it is usually open to parties to agree to an alternative method of dispute resolution. The best time to reach such an agreement is before the dispute arises. Typically, that agreement is documented in the form of a dispute resolution clause in the contract that governs the transaction.
Most dispute resolution clauses describe a mandatory process that starts with a notice of dispute, progresses to some form of negotiation and culminates in either a referral of the dispute to arbitration, or an ability to commence court proceedings.
Commercial transactions that involve international parties are ripe for arbitration. This is because:
- provided that all parties are signatories to the New York Convention, it is much easier to recognise and enforce a foreign arbitral award than a judgment given by a foreign court; and
- the parties can structure the arbitration agreement so that neither party has a 'home ground' advantage (for example, by nominating neutral locations as the governing law, seat and venue).
But what about domestic commercial transactions? When might arbitration be appropriate? Here are some things for you to consider:
1. The decision-maker
Parties to an arbitration agreement must agree upon the composition of the tribunal (how many people and whom). This will be relevant where resolution of a dispute is likely to require specialised expertise. It may also work to your advantage if you can convince your counterparty to agree to an arbitrator that suits the strengths of your case (for instance, a strong legal argument will lend itself to a black-letter lawyer as arbitrator). This may be contrasted with litigation, where the parties have no say in who hears their case.
2. Reputational damage and commercial sensitivity
Unless the parties agree otherwise, arbitrations are conducted in private, away from the prying eyes of journalists, and all information that relates to the arbitration (including its existence) is confidential. The flip side is that a claimant cannot use the prospect of reputational damage associated with court proceedings to leverage an early commercial settlement.
3. Speed
Arbitral proceedings tend to be faster than court proceedings: parties aren't constrained by the court calendar and are afforded a greater degree of procedural flexibility (see point 4 below). There are also very limited grounds upon which the arbitral award can be appealed (see point 6 below). Be aware that some institutions have published 'expedited' arbitration rules, which may be appropriate for lower value disputes.
4. Procedural flexibility
The procedural timetable in an arbitration sometimes replicates the procedure in court, but parties usually agree to do things differently. Here are two common examples:
- Instead of staged delivery of pleadings (formulaic documents that usually reveal very little about the actual dispute), evidence and legal submissions, many of the institutional arbitration rules require that parties exchange "memorials". A memorial is a narrative-style statement of a party's legal and factual case, to be accompanied by all evidence and legal authorities upon which the party relies. While the initial cost outlay is greater, the memorial approach will give you a deeper understanding of the case that you are required to meet, sooner, compared with court proceedings.
- Instead of wide-ranging disclosure (or discovery) of all documents that are directly relevant to an allegation in issue, the parties make targeted requests for specific documents or categories of documents in the form of a Redfern Schedule. To strike a balance between the rights of requesting and producing parties, documents must have sufficient relevance to the case and their production must not be unreasonably burdensome.
5. Related third party disputes
One of the shortcomings of arbitration is that it can be difficult to manage related disputes. Unless a third party is claiming "through or under" a party to the arbitration agreement, that third party can only be joined by agreement. Where possible, related contracts should be structured to reduce the potential for inconsistent determinations by different decision-makers (for example, a court and an arbitral tribunal). You should also consider whether you are more likely than your contracting counterparty to benefit from the proportionate liability scheme, which does not apply in arbitration, and your ability to contract out of that scheme.
6. Finality
You need only look at the number of decisions of first instance and intermediate courts that are overturned on appeal, and the prevalence of judicial dissents, to understand that reasonable minds may differ on the merits of a case. In an arbitration setting, parties effectively have no right to appeal an arbitral award on the merits of the case. Could you live with an arbitral award that you consider to be wrong?
7. Costs recovery
The successful party in an arbitration will typically recover more of its costs (up to 100%) than in court (~60% on a standard basis). Tribunals also have the power to settle costs, meaning that the parties can avoid the need for a full-blown costs assessment. Of course, better costs recovery for the successful party means greater exposure for the unsuccessful party.