As we come to the first anniversary of our internal arbitration newsletter, we are pleased to introduce a new series of articles exploring practical aspects of international arbitration. We begin this month with: 'Why arbitrate?'

Parties negotiating a dispute resolution provision will each endeavour to have the dispute resolved in the forum which favours their interests. This may be at the (a) adjudication stage, where one party may feel that it can obtain favourable treatment in its own courts with the other party fearful that it will not; or, (b) enforcement stage - the nature and location of the dispute resolution procedure may have an important bearing on how easy it will be to enforce the judgment or award.

The choice between arbitration or litigation in the courts is not one that can be made in a vacuum. The choice of the dispute resolution method will always depend on the circumstances of each case. For some types of contract; for example, engineering and construction contracts, arbitration is the dispute resolution method widely preferred by the industry. For other contracts, such as loan agreements, arbitration remains much less common because lenders may consider that arbitration is not the quickest and simplest method to enforce the lender's security. The identities and nationality of the parties, the location of assets, the nature of the dispute (potential or actual) and the courts which might otherwise have jurisdiction are only a few of the many factors which may have to be considered. It is possible for parties to a contract to agree that certain disputes arising under the contract are to be submitted to arbitration, whilst others are to be settled by state courts. In such a case, the jurisdiction of the courts and the arbitration remain exclusive for the particular dispute which has been referred to them. Unless these agreements are carefully drafted there can be disputes as to the extent of the jurisdiction of the arbitration or the courts.

Arbitration may be appropriate in the following situations:

  • To establish a neutral forum - Where the parties cannot agree on which courts are to have jurisdiction and look for a neutral forum which arbitration may be able to provide. This may arise where one of the parties thinks that the courts which might otherwise have jurisdiction are inadequately developed, may not be truly independent of the other party, or may be logistically inconvenient. Another valid concern may simply be a sense of discomfort in the legal system and culture of the country concerned. This is particularly true where State parties and state entities are involved.
  • Where court procedures would be lengthy and expensive - In arbitration, parties are able to agree their procedures, in particular as to: (i) the level of representation in the arbitration; (ii) the extent to which oral argument may be permitted; (iii) subject to the tribunal's availability, the time of the hearing; and (iv) the language of proceedings and documents to be used in the course of the proceedings. Accordingly, arbitration may be procedurally more flexible and reflect more the parties requirements.
  • To ensure enforceability - Where the decision will not be made in the same place that the debtor's assets are to be found. There a number of different regimes that cover enforcement of arbitral award. The most significant of these is the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as The New York Convention). It has been adopted by 159 countries to-date. It establishes an effective and widely accepted scheme for the enforcement of foreign arbitral awards. With the exception of the European Union, there is no scheme (with the same geographical scope) for the enforcement of foreign judgments. The grounds for refusal to recognize and enforce an award are minimal.
  • Where expertise in the subject matter of the dispute is an important attribute of the person who is to decide the issues.
  • A final binding decision is desired with a minimum, or no, right of appeal.
  • Confidentiality is required.

Arbitration may be neither appropriate nor possible in the following situations:

  • In the case of non-arbitrable disputes - Some legal systems place restrictions on the type of disputes which may be arbitrated. For example, some jurisdictions consider arbitration agreements which relate to future disputes to be ineffective. A dispute which is not "arbitrable" under the law applicable to the arbitration agreement cannot be settled by arbitration.
  • Where one party lacks the capacity to enter into an arbitration agreement - For example, some states or state agencies may not be a party to an arbitration agreement or may only participate in arbitration where there is specific authorization to do so.
  • Where coercive action may be required by way of final relief - For example, where injunctions are required. The courts of a number of countries will, however, grant injunctions in aid of arbitration proceedings.
  • Where efficient, quick and inexpensive justice is provided by the local courts - For example, summary judgment on liquidated debts. It should be noted that in some circumstances arbitration may be more expensive than state court. The parties to arbitration must pay the fees of the arbitrator and the costs of the arbitration venue, as well as the administrative fees of any arbitral institution which may be involved. In most states, the courts, though not a free service, are comparatively cheap.
  • Where one party is likely to be deliberately obstructive.
  • Where court procedure is likely to confer a particular advantage in the context of the actual or anticipated dispute - For example, full discovery or a coercive order capable of immediate enforcement.
  • Where proceedings might involve more than two parties in connection with disputes arising out of related contracts.
  • Where the parties want to retain a right of appeal which would otherwise be prohibited under the law of the place of arbitration.