Litigation – that is, formally dealing with a dispute through the parties’ domestic courts – has long been the go-to solution when commercial disputes arise, but this form of dispute resolution has been regarded as lengthy, costly, and does little to preserve any commercial goodwill between the parties involved.
Conversely, Arbitration has become an internationally welcome form of commercial dispute resolution.
So, what does arbitration entail, and is it the right choice for you should you find yourself at the centre of an ongoing commercial dispute?
What is arbitration?
There are times where formal litigation is unavoidable. However, both commercially and within the judiciary, there is a growing interest in, and encouragement of, alternative dispute resolution [ADR] – that is, procedures for resolving disputes outside of court.
Arbitration is one such form of ADR. The powers of an arbitral center or court stems from the New York Convention 1958, under which contracting states agree that their domestic courts shall recognise and enforce foreign arbitral awards. Examples of the most prominent arbitration centers and courts include the London Court of International Arbitration (LCIA), the Swiss Arbitration Centre, the Hong Kong International Arbitration Centre (HKIC), and the International Chamber of Commerce (ICC).
A contractual clause may provide that a particular arbitration center will have jurisdiction to consider a potential dispute. However, a dispute may be referred to arbitration by way of separate arbitration agreement.
The parties involved in the dispute will then appoint an arbitrator – an impartial third party with expertise in the area in dispute. This might be a single person, a sole-arbitrator, or an arbitral tribunal. An arbitration clause or agreement may also determine how the tribunal will be formed. As well as possessing specialist insight into the relevant areas involved in the dispute, the tribunal can include the most well-respected and experienced lawyers within that jurisdiction, and can often include lawyers qualified in both civil and common law, which is particularly useful in cross-border disputes.
The arbitration will be governed by the procedural rules published by the various arbitration centres, which are drafted to provide the parties with flexibility and choice as to procedure. Any hearings can take place in a venue within the ‘place’ (location) of the arbitration, whilst the agreed ‘seat’ of the arbitration (the applicable law) will determine how the arbitration is supervised and conducted. Despite not taking place in court, it’s important to note that the decision made by an arbitration tribunal is legally binding, meaning parties are obligated to follow it. As above, parties may also turn to the domestic courts to seek enforcement of an arbitral award.
Benefits of arbitration
Perhaps the greatest asset of arbitration as a method for solving commercial disputes is the parties’ (and the tribunal’s) ability to expedite the resolution of the claim, compared with the domestic courts. Court processes are often slow, so parties wishing for a speedy resolution to their dispute may opt for arbitration on this advantage alone. In most cases, arbitrators can deal with a dispute within the proposed timescale of the parties involved.
Related to this is increased flexibility of the arbitration process, where the process can be better adapted to the availability of the parties, compared with a court process which is far more fixed and rigid.
Arbitration can also be a more cost-effective option, as the quicker resolution time reduces the time spent attending to the dispute that can be focused on the parties’ respective commercial interests.
Commercial disputes can often be highly technical, and as such, the ability to appoint an arbitrator who is an expert in the subject matter in question is yet another huge advantage over litigation, as is the ability for parties to choose their arbitrators. In court proceedings, no such choice over the presiding judge exists.
Finally, court proceedings are open to the public. For sensitive commercial disputes where parties wish for their interests to remain private, the arbitration process offers this confidentiality.
Drawbacks of arbitration
Arbitration offers some unique benefits as a method of dispute resolution when compared with litigation, but there are also some potential disadvantages associated with going down the arbitration route.
Though often a cost-effective option when compared to litigation, arbitration can still pose a significant cost, particularly in cases where the dispute is complex. Likewise, in these complicated instances, litigation may still be a speedier resolution, such as instances where finding mutually acceptable hearing dates is a challenge.
Like litigation, arbitration is still fundamentally an adversarial process, and as such, parties may be unhappy with the decision imposed upon them. Due to this adversarial process, those in the middle of a commercial dispute wishing to preserve as much goodwill between parties as possible, may still prefer to investigate other methods of ADR, such as mediation.
The decision of the arbitrator is legally binding, but unlike in court proceedings, this decision can be incredibly difficult to appeal, offering little in the way of recourse for parties that find themselves at a disadvantage at the end of the arbitration process. Similarly, though this decision is legally binding, it is not legally enforceable, and in some instances, enforcing the decision of the arbitrator may still require a judicial remedy.
Is arbitration right for your business?
Deciding whether litigation, arbitration or a different form of dispute resolution is the best option for you requires weighing up these various pros and cons as related to your specific commercial dispute.
One of the key considerations here should be the exact nature and complexity of the dispute in question, as well as its technical nature. Naturally, your budget and time constraints will also play a role in determining the best method to pursue, but more broadly, it’s also important to consider how significant the impact this dispute might have on your business is. Privacy concerns may also play a central role here, so it’s crucial to consider whether the confidentiality of the arbitration process is better suited to your needs than court proceedings that are a matter of public record.
Finally, you may want to consider how important maintaining a cordial and positive relationship with the other party involved in the dispute is. In situations where an opposing party is hostile, uncooperative or obstructive to the arbitration process, litigation may be your only recourse.
Final thoughts
Choosing the right method for solving business disputes as they arise is vital to ensuring your commercial interests are protected. Dispute resolution is a complex area to navigate, so it is important not only to understand the advantages and disadvantages of alternatives to litigation such as arbitration, but to also have access to the right legal advice to ensure your best interests are served throughout the dispute resolution process.
Yulia Barnes is Founder and Managing Partner of Barnes Law.
