Why choosing the right Dispute Resolution Clause matters
It is absolutely critical, for parties to a transaction, to give careful consideration as to how they would wish to resolve a future dispute before they sign a contract with each other. In most cases, one party will not have a choice in the matter, owing to the nature of the transaction or an inequality of bargaining power. However, where you do have a choice, you should pause for thought, because the type of clause that you sign up to can have significant consequences.
In practice, contracts will provide that disputes should be resolved either through the courts (litigation) or arbitration. Each comes with their own pros and cons and while there is often no single, correct choice, this article aims to highlight some of the key considerations and differences between them when deciding which process might be right for you.
Litigation or arbitration- what’s the difference?
It is very rare – and extremely dangerous – for a contract to be silent as to how future disputes will be resolved. Without a contract and a dispute resolution clause, a party wishing to bring a claim will have to persuade a court that it has jurisdiction over a defendant and satisfy a court as to the proper law that should apply. That is not always straightforward in international transactions where contracting parties are based or reside in different countries and where the key performance obligations are taking place in multiple jurisdictions. For this reason, parties will stipulate where they wish disputes to be decided (the jurisdiction), how they wish disputes to be resolved, by who and pursuant to which law. This article focuses on the “how” and the “who”.
As noted above, and leaving aside provisions which deal with alternative dispute resolution mechanisms, such as mediation, the how and the who will invariably come down to a straight choice between referring a future dispute to a court or opting for arbitration. So, what are the differences between the two?
What is court litigation?
Court proceedings are governed by national laws (in most cases) and procedural rules and are heard by local judges. In line with the principle of ‘open justice’, most court cases will be public, meaning that members of the public (including journalists) can attend and report on hearings and get access to court documents and judgments. Court decisions are also open to relatively wide grounds of appeal. In England and Wales, we have several different types of courts, but the basic distinction is between the “County Court”, which deals with lower value disputes, and the “High Court”, which deals with higher-value, more complex, cases. Monetary and other thresholds apply. Any party wishing to litigate through the courts must pay a fee, the size of which depends on the type of court, the size of the claim and the nature of the remedy that you are seeking (damages, a declaration and so on), but once you have paid that fee, the cost of the court process is more or less free after that point. It is essentially a taxpayer-funded process.
What is arbitration?
Arbitration, in contrast, is a private dispute resolution process, takes place behind closed doors and which the parties have to fund themselves. Arbitration is not open to all. The parties have to agree in their underlying contract that any dispute will be referred to one or more arbitrators, whose decision (called the ‘award’) will be binding on them. Arbitrations can take a number of forms. They are usually administered by an institution, such as the ICC, the LCIA, the SIAC of CASS, each of which has its own procedural rules and fee structures. However, they can also be what is known as “ad hoc”.
The key differences between litigation and arbitration
The key differences between English and Welsh court proceedings and arbitration, include:
1. Confidentiality – whether the dispute is resolved in public or private proceedings.
One of the main reasons for opting for arbitration over litigation is the confidential, private, nature of the process. The hearings and documents produced in arbitration proceedings are not accessible by the public, unlike in most litigation matters. The arbitration awards are usually also private, although on occasion they can be published, usually on an anonymised basis. Parties may therefore prefer arbitration where their disputes are likely to involve sensitive, confidential, information that they do not want their competitors or the public more generally to learn about.
On the flipside, litigation may be preferable, or even necessary, in cases where there is a need for a publicly reasoned decision to clarify the law, set a precedent and/or hold larger entities publicly accountable. In litigation, the prospect of media interest and public scrutiny/outcry will often represent a powerful tactical tool for bringing your opponent to the negotiating table and achieving a settlement.
2. Control – the extent to which the parties have control over the process, including who decides their dispute.
In litigation, the process is governed by the applicable court rules and the parties have no say in which judge(s) are appointed to decide their case. In the England and Wales, judges have wide-ranging powers to manage cases efficiently and proportionately, including setting deadlines and ordering parties to disclose documents/evidence.
In arbitration, on the other hand, parties can decide the background of the individual arbitrator depending on whether the issues in dispute are predominantly of a commercial or legal nature and the number of arbitrators that will hear their case (usually one or three), as well as their qualifications, nationality and expertise. Unlike in litigation, where the judges are all legally qualified (typically following distinguished careers at the Bar), in arbitration it is open to the parties to agree to appoint both legally qualified professionals, as well as those who have expertise in other areas that may be relevant to the dispute. For example, in a very fact sensitive construction dispute, it may be preferable to appoint a civil engineer or an architect as one of the arbitrators.
Arbitrations also offer a wider degree of flexibility regarding the process, with parties having a say in the “seat” (the country where the arbitration is based) and the language of the proceedings (which do not have to be the same as the parties’ nationality or place of business) and also more say in how the case should be streamlined.
3. Timescales – how long will the process take from start to finish?
The timescales for litigation vary from country to country and will be a key consideration when choosing between litigation and arbitration in international disputes. In England and Wales, litigation tends to follow a relatively stringent procedural timeline with limited opportunities for the parties to extend the court deadlines. However, it is rare for a commercial dispute to be decided within 12 months, and it is common to take twice that time for a judgment to be delivered.
The biggest delays in cases often relate to the “disclosure” phase, where parties are typically required to disclose relevant documents. In this respect, there are some key differences between the two processes which could be relevant to your choice of dispute resolution clause. With court proceedings, parties generally have to give disclosure on the “standard” basis, which is to say that they have to search for, and produce, documents which are relevant to the issues in dispute irrespective of whether they help or harm their/the other party’s case. But with arbitration, disclosure is often more limited and confined to the documents on which a party seeks to rely. This distinction can make a big difference in practice.
Another feature of arbitration is its relative flexibility and procedural simplicity. High Court proceedings are generally very well managed these days by Judges, and the process is getting better all the time. But there is significant pressure on the system, which suffers from the same funding issues as other publicly funded components of the state. Arbitration is more nimble. But while flexibility can help to streamline arbitrations, it can also lead to delays when parties are given multiple extensions of deadlines that they would not have been afforded in court proceedings. Arbitrations can also get sidetracked by procedural issues before the case even gets off the ground. One example of this could be issues around appointment of arbitrators or disagreements over the seat and/or applicable law, especially if the arbitration clauses are ambiguous on these matters.
4. Cost – how much will the dispute resolution process cost?
This is a key determining factor along with that of confidentiality.
All litigation is expensive, but arbitration will frequently be more expensive than High Court litigation. This is largely due to the difference in the administrative cost of the two systems.
As noted above, the UK courts are publicly funded and, with the exception of the claim issue fee (which can be up to £10,000), are largely free to use. Arbitrations, on the other hand, are privately funded by the parties and the fees can be very high, especially if there are multiple arbitrators and the fees are linked to the value of the claim. The default rule is that the parties share the cost of the arbitrator and the administrative body, but if a defendant refuses to pay their share, the claimant will usually be directed to bear all the administrative costs.
The position with respect to the costs of the parties’ own legal representatives (solicitors, barristers and expert witnesses) is the same for both English and Welsh court litigation and arbitration. Similarly, the losing party will usually be ordered to pay the winning party’s reasonable legal costs in both processes, with the winning party usually awarded around 60% to 70% of its costs from the losing side on the standard basis. In other jurisdictions, that may not be the case.
5. Grounds for appeals – how easy will it be to challenge and overturn decision?
An important and commercially attractive feature of arbitration is its finality. In particular, there are very limited grounds upon which an award can be challenged (for instance procedural irregularity or lack of jurisdiction).
On the other hand, court judgments can be challenged through various appeal courts, largely on legal grounds (e.g. an error or miss-application of the law or a point of legal construction). It is also not unusual for there to be cross-appeals, where each side appeals some aspects of the court’s judgment.
While arbitration therefore affords more finality and closure, litigation allows more opportunities to correct legal or factual errors. The latter inevitably increase the timescales and associated costs of reaching the final, unappealable decision and can, at times, result in litigation dragging on for over ten years.
6. Enforceability – how easy will it be to enforce the final award, especially in a different country/jurisdiction?
With any legal proceedings, particularly multi-jurisdictional dispute, the ease and availability of enforcement of a judgment or award will invariably be one of the single most important considerations when deciding whether to assume the risk of suing a party. Again, there are important differences between court litigation and arbitration.
Arbitrations benefit from the New York Convention, which is an international treaty that requires the courts of over 170 signatory countries to recognise and enforce arbitral awards as if they were domestic judgments, subject only to limited exceptions e.g. illegality and serious procedural irregularities. This makes arbitrations one of the most powerful tools for resolving cross-border disputes.
Court judgments can be harder to enforce internationally. While reciprocal enforcement treaties and regimes exist between major countries and trading blocks, that is not always the case; and there can also be additional procedural steps involved when enforcing a court judgment in a different jurisdiction.
Accordingly, where the respondent has assets in different countries and/or is likely to move assets to avoid enforcement, arbitration can provide a clearer and more certain enforcement route. As ever, it all depends on the facts of any given case.
Arbitration vs Litigation – which is right for your business?
In summary, where a party or parties have a choice in the matter, they should always carefully consider whether they are better off litigating or arbitrating any future disputes before drafting or signing a contract. There is no right or wrong answer, and much will depend on the specific circumstances of the parties and their contractual relationship with one another.
While arbitration offers privacy, flexibility and more streamlined cross-border enforcement, litigation offers transparency, established procedural safeguards, including more extensive rights of appeal, and wide-ranging court powers.
Getting the dispute resolution clauses right at the start will help to protect your business interests and relationships and resolve disputes efficiently when they do arise.
If you’re considering your dispute resolution options, then contact us here, to speak to one of our Commercial Litigation or Arbitration Team.
