Overview

Broadly speaking, the cost of a dispute includes parties' expenses in relation to attorney fees, procedural costs (court or arbitration fees) and additional expenses (eg, transport and food costs). In addition, there are hidden costs, such as the opportunity cost of the dispute, a key concept in economics – that is, the cost of an alternative allocative use of the financial resource that remains idle during the dispute, as the creditor has not yet received the sums corresponding to its right. There are also transaction costs (eg, costs incurred to obtain information and negotiate and enforce the contract). Lawyers use economics to determine these costs.

In terms of these costs, on a superficial analysis, arbitration appears costlier than litigation, as the parties must pay arbitrators' fees, while judges are paid by the government of the countries where the dispute occurs. However, on a more careful analysis, it is evident that the inverse conclusion is true (even without considering the fact that the more litigious a society is, the greater the costs for taxpayers).

Arbitration or litigation?

International Chamber of Commerce studies suggest that legal fees are the main factor in raising the cost of arbitration. In this regard, some scholars(1) have observed that international arbitration has been dominated by Anglo-American offices since the 1990s, and there might be a correlation between increased arbitration costs and the prevalence of large common law national law firms. Moreover, a dispute in state court will involve lawyers. Therefore, the higher cost of arbitration is not as obvious as it first appears. In particular, in jurisdictions where attorneys are more costly, litigation may be even more expensive than arbitration.

In this sense, it is relatively cheap for parties to litigate in countries such as Brazil, as lawyers generally charge little compared to the international standard rates. In contrast, in Anglo-Saxon countries, particularly in the United States, court proceedings are expensive because of the high cost of lawyers, who usually charge per hour worked. This is particularly where a dispute involves many professionals in highly private adversarial procedures. In addition, there is a pre-procedural phase (ie, discovery), which significantly increases the cost of litigation before a public court.

Therefore, from a strictly financial standpoint, it is unclear whether international arbitration is effectively more expensive. Presumably, holding litigation in a country with lower costs (eg, Brazil) tends to be cheaper than litigation in a North American court. Moreover, through the use of economics, costs can be analysed more broadly, which highlights the economic advantages of arbitration.

Benefits of arbitration

The average time for resolving an international trade dispute tends to be shorter in an arbitration chamber than in a court, given the formalities that the judicial process must meet (eg, letters of request and sworn translations). As a rule, even when factoring in that attorneys' fees are the main cost, a swifter procedure like arbitration is usually less expensive than a longer procedure like litigation. Further, the opportunity cost of a speedy settlement cannot be denied.

While some argue that arbitration is not as speedy as desired, there is no empirical evidence that public courts are more efficient are more efficient than arbitration tribunals in international commercial litigation. When factoring in the lower level of formality of arbitration, the presumption is the opposite.

The lack of expertise of the judiciary in international matters should be added to the final cost of the litigation (transaction costs also included here). Therefore, when all costs are calculated, the economic pendulum seems to favour arbitration. That said, there are always ways to reduce arbitration costs.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information please contact Luciano Timm or Isabela Popolizio Morales at Carvalho, Machado & Timm Advogados (+55 11 2872 4760) or email (ltimm@cmtlaw.com.br or ipopolizio@cmtlaw.com.br). The Carvalho, Machado & Timm Advogados website can be accessed at www.cmtlaw.com.br.

Endnotes

(1) Garth and Dezalay (2006)