No training programme for first year arbitration associates is complete without an exploration of the advantages of arbitration versus litigation. Young lawyers learn the attractions of confidentiality and the enforcement benefits of the New York Convention. They hear the risks of finality and potential lack of predictability. Ultimately, we explain these to our clients, who make the decisions.

Similarly, many surveys in our industry start with the same question: do you prefer arbitration or litigation? The wording of the question varies but the main difference is usually the audience. Some surveys are focused on those already working in the world of arbitration, or include both clients and private practice lawyers in their respondent base.

Although the results can be useful, we were interested to know the current undiluted views of clients – the end users who make the final call. A recent survey commissioned by Baker McKenzie gave us the opportunity to ask this question. Our research team contracted 600 legal and risk leaders from large organizations (annual revenue greater than USD 500 million) based in the UK, USA, Singapore and Brazil, in September and October 2021.

Headline results and regional breakdown

We asked a range of questions focused on international dispute resolution, including respondents’ preferred mechanisms for resolving both domestic and international disputes. The headline results were illuminating.

In the scenario where a settlement is not an option, what is your preferred dispute resolution mechanism for domestic disputes?

In the scenario where a settlement is not an option, what is your preferred dispute resolution mechanism for international disputes?

In short, about a third of end users (35%) prefer arbitration for domestic disputes, whereas almost two-thirds of end users (62%) prefer arbitration for international disputes. We consider this result to be driven largely by enforcement benefits and the ability of arbitration to provide a neutral venue for parties from different jurisdictions.

There are some interesting regional variations. The UK shows a comparatively lower preference for domestic arbitration, perhaps driven by the popularity of London’s commercially-minded courts. The popularity of arbitration for international disputes is relatively lower in Brazil. Whilst all four regions have strong arbitration institutions, perhaps the institutional profiles are a little stronger in the other three locations.

Breakdown by company size

We also split the data by company size, which showed no clear pattern. The smallest companies in our survey had turnover in the range of USD 500 million to USD 1 billion. The largest companies had turnover in excess of USD 25 billion. Therefore, no genuinely small or medium size companies were included in the survey. We can say simply that once a company reaches USD 500 million of turnover, its preferences on arbitration appear to be driven by factors other than size.

Breakdown by industry sector

When we split the data by industry sector, we found interesting results.

In the scenario where a settlement is not an option, what is your preferred dispute resolution mechanism for domestic disputes?

Total Industrials, Manufact-uring & Transport-ation Consumer Goods & Retail Energy, Mining & Infra-structure Healthcare & Life Science Technology, Media & Telecoms Financial Institutions
Litigation 65% 66% 61% 69% 65% 60% 69%
Arbitration 35% 34% 39% 31% 35% 40% 31%

In the scenario where a settlement is not an option, what is your preferred dispute resolution mechanism for international disputes?

Total Industrials, Manufact-uring & Transport-ation Consumer Goods & Retail Energy, Mining & Infra-structure Healthcare & Life Science Technology, Media & Telecoms Financial Institutions
Arbitration 62% 64% 62% 65% 57% 65% 60%
Litigation 38% 36% 38% 35% 43% 35% 40%

EMI companies show relatively lower levels of preference for domestic arbitration, and healthcare companies have relatively lower levels of preference for international arbitration. Financial institutions show lower levels of preference for both domestic and international arbitration, compared to other industries.

The EMI result may be surprising, as this sector – particularly construction – is known for its common use of arbitration. These are often disputes which turn on complex technical facts, and the ability of arbitration to provide decision-makers with industry expertise is particularly valuable. The answer probably lies in the question posed: settlement options were ruled out. Operators in this sector encounter frequent disputes and their legal teams are adept at keeping them away from formal proceedings altogether.

Healthcare companies arbitrate many international disputes but courts may be the only option for certain types of dispute, such as IP infringements requiring injunctive relief.

The result for financial institutions is less surprising, as banks are not known to be the most enthusiastic users of arbitration. It is sometimes said – rightly or wrongly – that because financial disputes often turn on points of law or contractual construction, a court is the more appropriate venue. There may also be value in a binding precedent on the construction of a particular term in a finance document. And courts may be able to provide a simpler enforcement mechanism for some types of financial claim.

Conclusions

Large organisations tend to prefer litigation for domestic disputes, and arbitration for international disputes. There are regional variations, which are likely driven by experiences with the local institutions. There is some evidence to support the received wisdom on industry preferences for arbitration; however, the margins of difference between industry preferences are small. Sophisticated litigants and their advisers will assess and weigh a range of advantages and disadvantages before choosing a dispute mechanism, resulting in finely balanced preferences. Maybe, as is so often the case, reputation is lagging reality.

Baker McKenzie’s report The Year Ahead: Global Disputes Forecast 2022, was released on 4 January 2022.