Arbitration: the Good, the Bad and the Ugly

Speed Read

Broadly speaking, English High Court litigation is the preferred choice if your counter-party is based in the EU because the process is relatively quick and enforcement of High Court judgments (in reliance on relevant EU legislation) is also relatively quick and simple. There are further points of nuance but essentially the choice comes down to this: are there assets to enforce against in the EU (opt for litigation) or not (opt for arbitration)?

Arbitration: What is it?

Arbitration is a private procedure for the resolution of disputes whereby an arbitrator (or possibly a panel of three arbitrators) is appointed by the parties to make a binding decision on the dispute. Effectively, arbitration is a private version of going to Court. That said, the arbitration process tends to be somewhat less formal than traditional courtroom litigation, and tries to play down some of the more adversarial elements of the litigation process.

Arbitration: The Good

The key advantages of arbitration are as follows:

Enforcement

Without doubt, the ability to enforce arbitration awards more or less globally is the biggest point in its favour.
When deciding between litigation or arbitration as a form of dispute resolution you should ask two questions:

1. Where are my counterparty’s assets located?
2. Can I enforce an English Court judgment there?

As an example, if your counterparty’s assets are in America you would opt for arbitration as although it is theoretically possible to enforce an English Court judgment there it will, practically speaking, be much easier to seek enforcement of an arbitration award.  Conversely, if your counterparty’s assets were in, say, Germany, you would opt for litigation as intra-EU enforcement of an English judgment is a simple process and the cost of English High Court proceedings is typically less than a comparable arbitration.  The position in relation to enforcement of English High Court judgments in non-EU countries is typically substantially more complicated and limited in scope than enforcement of an arbitration award in comparable terms.

Arbitration: 149 countries have signed up to The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, an international convention governing the enforcement of arbitral awards in foreign jurisdictions. This is particularly useful where the defendant’s assets are located outside the EU.

Litigation:  A claimant who has obtained a judgment from a court in an EU member state may enforce that judgment in all other member states.

Confidentiality

Arbitration, unlike court proceedings, is a private process and the hearings are only attended by the tribunal, the parties, and their representatives. The parties can also agree that the award is to remain confidential.  By contrast, English courts operate a policy of open justice and English judges are intensely reluctant (unless family or national security matters are in issue) to hear cases in private.

If one or both of the parties is a listed company and the arbitration is for a material amount, appropriate disclosures will have to be made to the relevant stock exchange.  In practice the disclosures go to the fact of the arbitration, or the amounts in issue and the result.  Evidence given to an arbitration tribunal will invariably remain confidential, notwithstanding any relevant stock exchange disclosures.

Specialist Expertise

Where a dispute raises technical or scientific issues, the parties can choose a tribunal panel with relevant experience of that subject matter. However, as with litigation it is pretty much standard practice for parties to appoint independent subject matter experts in such specialist areas.

Neutrality

Arbitration takes places in a neutral forum to be selected by the parties. This is particularly important for international companies who are dealing with a counterparty in a foreign jurisdiction. Depending on the jurisdiction, there may be a fear that the courts in the country in question are not impartial, particularly where the domestic counterparty is that country’s government or a parastatal entity of it.

Appeal

Opportunities to appeal an arbitration award are very limited. Depending on the outcome this can be an advantage but in any event the restricted scope for arbitration appeals does tend to promote finality of disputes.

Arbitration: The Bad

Cost

Arbitration is typically more expensive than litigation. There are additional costs payable in arbitration which are not applicable to court proceedings e.g. the arbitrators’ fees (particularly where there is a panel of three), administrative expenses and the venue hire.

By contrast, in England companies and individuals have access to judges of the highest calibre and court rooms for a relatively modest court fee of about £2,000, no matter how long the dispute lasts.

Delay

Delays can be more common in arbitration than litigation as arbitrators lack some of the greater powers that Courts have to ensure that the parties adhere to the pre-trial timetable.
The most highly regarded international arbitrators are always in demand and the business of their schedules can cause delays, particularly where the parties have selected three busy and popular arbitrators.

Multi-party disputes

Arbitration may not be suitable where there are several parties to a dispute. For example, many international business transactions involve a complex structure of contracts between different parties. There is no power to force third parties to join an arbitration, unlike litigation where parties can easily be joined in an action whether they agree to it or not.  Institutional rules do make some provision for these situations but the solutions could fairly be described as imperfect.

Conclusion

Careful consideration should be given to whether to litigate or arbitrate when deciding on the most appropriate dispute resolution procedure for your contracts. The optimal approach will vary depending on the type of contract, the identity of the counter-party and the jurisdiction in which they have their assets.  The key point is to always ask yourself at the outset of the deal: where are the assets if this all goes wrong?  The answer to that question tends to make the decision for you.

Jane Marsden