Arbitration is a method of private, final and binding dispute resolution before a neutral tribunal. The tribunal derives its jurisdiction from the parties' agreement to submit their disputes to arbitration. Arbitration is supported by statute and international conventions and has become the favoured method for resolving cross-border commercial disputes.
In this, the first part of our second 'before you take the plunge' mini series, we look at the pros and cons of international arbitration, including flexibility, privacy and confidentiality, pre-emptive remedies, speed and cost.
What are the primary advantages of arbitration over civil litigation?
Arbitration awards are readily enforceable in the vast majority of countries pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). The New York Convention has been ratified or acceded to by 146 states.
An arbitral award made in a New York Convention state is readily enforceable in any other New York Convention state. Enforcement possibilities for court judgments can be more limited; and reciprocity agreements can vary from country to country.
Arbitration provides greater procedural and substantive flexibility than civil litigation. Subject to certain limitations designed to ensure the fairness of the process, arbitration provides a general framework within which a bespoke dispute resolution process, appropriate to the parties' needs and their dispute, can be developed. National courts adopt a far more prescriptive approach.
Arbitration is a neutral means of dispute resolution and can deliver a procedurally level playing field, where neither party has to submit to the other's national courts so that neither has home advantage.
Privacy and confidentiality
Arbitration is generally private and confidential. However, if parties have sensitive issues in dispute, it is advisable to include strict confidentiality provisions in the arbitration agreement at the outset.
In contrast, civil litigation is public in nature and third parties can usually attend hearings and have access to statements of case and other documents on the court's file.
Selection of arbitrators
Parties often select arbitrators because of their expertise or experience in the subject matter of the dispute, especially in maritime, insurance and construction disputes. Judges (in non-specialist courts) tend to be selected on availability, rather than an understanding of, or expertise in, the subject matter of the dispute.
Arbitration is very close to being a "one stop" dispute resolution method. In many legal systems, national courts may only review arbitral awards in strictly limited circumstances which may be further restricted by the parties. For example, under the English Arbitration Act 1996, an arbitral award can only be set-aside for: lack of jurisdiction, procedural impropriety, and an appeal on a point of law (the latter of which can be excluded by agreement). With civil litigation, appeals can delay a final resolution of the dispute by many months and sometimes years, and can have huge costs implications.
What are the commonly perceived disadvantages of arbitration?
The flexibility given to arbitrators to rule on the procedure for an arbitration can create uncertainty, delay and additional cost. Unscrupulous parties may strategically delay matters by making a variety of submissions not available to them in litigation.
Due to its contractual nature, it is generally not possible to join third parties to an arbitration unless (1) they are a party to the arbitration agreement, or (2) all the parties (including the third party) give consent. Thus, a respondent in an arbitration cannot seek to pass liability to another party and add it as a third party, as it could do in court proceedings.
Likewise, the consolidation of multiple, but related, disputes brought by parties under separate agreements in the same arbitration proceeding is often impossible. Arbitration agreements are commonly drafted to refer only to disputes arising in relation to "this agreement", thus depriving the tribunal of jurisdiction to determine disputes arising under other, related agreements.
Care must be taken when drafting the arbitration agreement to ensure that any overlapping or related liabilities can be submitted to the same dispute resolution process and, where possible, the same tribunal. This will avoid the time, costs and risks of related disputes being resolved concurrently by different tribunals or courts, particularly where they may come to conflicting, but binding decisions.
An arbitral tribunal generally has limited powers to grant pre-emptive remedies (such as freezing orders or interim injunctions). Where urgent or necessary, an application may have to be made to the court for an order to be effective in any event.
In certain jurisdictions (including England) courts have limited powers to make interim orders, such as interim injunctions, in support of arbitration.
However, the court's powers can often be limited by the parties' agreement and it is possible for parties to exclude the courts' ability to make interim orders altogether. If the nature of the contract is such that interim remedies are likely to be required, express provision should be made.
Speed and cost
Arbitration has been criticised for taking longer and being more costly than civil litigation. That is not necessarily true and will depend on the nature of the case, the behaviour of the parties, and the dynamism and availability of the tribunal.
Some additional costs are unique to arbitration, such as the arbitrators' fees and venue hire costs, which increase the cost. Save for court fees, the time of judges in English civil proceedings is (at least at the moment) provided at no cost to the parties.
However, the procedural flexibility afforded by international arbitration does allow parties to agree upon an efficient procedure to make the process quicker and cheaper than the court-based alternative. Arbitrators and the well known arbitral institutions are also coming under pressure to reduce the time and cost of an arbitration.