- Arbitration is popular because it is procedurally flexible, tribunals have a high degree of specialized knowledge, and awards can be enforced the world over. Most States strongly support and facilitate arbitration to ensure that a viable alternative to court litigation exists.Freely functioning arbitration is one of the core components of a business-friendly environment that offers a choice between court litigation and arbitration as a private dispute resolution method.
Commercial arbitration is a means of settling private/commercial disputes by referring them to a neutral body, appointed by the parties, who renders a binding decision.
In terms of procedure, arbitration has much in common with court litigation: parties make written submissions and are given the opportunity to present their arguments and examine witnesses at the hearing. Arbitration is however generally more flexible than litigation, and its procedures can be tailored to the case at hand.
A binding arbitral award can be enforced against the assets of the losing party wherever they are located. Only in limited circumstances is a losing party able to set aside an arbitral award or resist enforcement.
A starting point for lawyers and non-lawyers considering arbitration as a means of resolving their current or future disputes is to understand basic pros and cons of arbitration.
- Neutrality: Arbitration offers a neutral forum for companies (especially those which operate internationally), who may be reluctant to submit their disputes to national courts. They can benefit to have a neutral arbitral tribunal that would resolve their dispute.
- Procedural flexibility: Arbitration offers more flexibility than litigation. The parties themselves are free to choose the entire process. They select the arbitrators, the timeframes and rules that govern the procedure as well as where and in what language their dispute will be resolved.
- Expertise: The parties can select an arbitrator with specific legal and industry expertise, cultural background, and language skills.
- Confidentiality: Arbitration, unlike open court, is a private matter between the tribunal and the parties, which allows the proceedings and their outcome to remain confidential. This confidentiality enables commercial parties to ensure that sensitive information is not leaked.
- Speed, finality, and cost: Unlike court proceedings, which often lead to multiple appeals, an arbitral award is final and binding and can only be set aside in limited circumstances. Arbitration is usually considered quicker and cheaper than litigation.
- Enforceability: An award can be enforced against the losing party’s assets regardless of their location. The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards has over 170 State parties and provides for recognition and enforcement of arbitral awards in all member States. During the enforcement process, different assets located in different countries can be targeted simultaneously, and if outstanding sums cannot be fully recovered at once, new assets of the debtor, whether acquired or discovered later, can be seized. By contrast, the enforcement of court judgements abroad can prove a difficult and often impossible task.
Additional characteristics: aimed at greater efficiency of the arbitral process
- Expedited procedure: Most arbitral institutions provide for an expedited arbitration procedure, which is a simplified, faster, and cheaper procedure best suited for low-value disputes, that results in a binding award.
- Emergency arbitrator: Many arbitral institutions also provide for emergency arbitrator that offers a short-term solution for the parties that cannot wait for the constitution of the arbitral tribunal. The emergency arbitrator renders a decision (before the tribunal is formed) that can then be revisited by the tribunal once constituted. (see, for example, ICC, LCIA, SCC, SIAC, GIAC, ISTAC).
- Limited possibility for appeal: Litigation may be a better option if the parties wish to preserve their rights of appeal. As a general matter, there is no right to appeal even if the arbitrator makes mistakes of fact or law.
- Limits imposed by privity of contract: Arbitral awards only bind the parties involved. No binding orders or enforcement can be obtained against third parties.
- Lack of transparency, affecting the predictability of the outcome: Arbitral awards do not create an authoritatively binding legal precedent. Because of the absence of such precedent, it is sometimes considered that the outcome of arbitration is less predictable than that of court litigation.
- Confidentiality (when publicity could be useful): In certain circumstances, a party may prefer to publicize the dispute, for example, to put pressure on the opposing party. In those cases, litigation might be more favorable than arbitration.
Arbitration clauses are sometimes referred to as “Midnight Clauses”, because they are often among the last provisions negotiated before finalizing a contract. At that stage, the parties will be most probably anticipating a prosperous business relationship and give little attention to the possibility of a potential dispute. Careful drafting of the arbitration agreement is of crucial importance, while shortcomings in the arbitration clause is one of the sure ways of frustrating the arbitration process.
While there may be a whole range of deficiencies in an arbitration agreement, there are certain particularly common mistakes that can be easily detected and avoided.
- Parties should avoid drafting an overly simplistic arbitration clause that lacks basic information about the parties’ consent to arbitration and basic procedural rules. They should also refrain from using an excessively detailed arbitration provisions that attempts to precisely determine the procedure in every foreseeable scenario.
- It is generally advisable to include a concise arbitration clause that sets forth the basic terms of the parties’ agreement to arbitrate their disputes. In this regard, a good starting point would be to consider using the standard arbitration clauses provided by arbitral institutions, available on their websites (for example, ICC, SCC, LCIA, VIAC, SIAC, ISTAC, GIAC, TIAC).
A few further basic tips will assist with making informed and strategic choices about the content of an arbitration agreement, are discussed below:
- Choosing a seat of arbitration: The “seat” of arbitration is vital. The seat is a nominal location that governs certain formal and procedural aspects of arbitration and determines which court system provides a supervisory jurisdiction over the arbitral process and the validity of the award. Preference should be given to countries with arbitration-friendly legislation and courts. Designation of a particular seat does not oblige parties to hold meetings and hearings at that location (the hearings can be also held remotely).
- Choosing the applicable law: The parties’ ability to predetermine applicable law during the contract drafting phase is a key strategic advantage. By deciding at the outset, parties can be assured that their disputes will be arbitrable under their chosen law, and expensive, time consuming proceedings to determine the applicable law are avoided.
- Appointing the arbitral tribunal:
The parties may directly participate in the appointment of the arbitral tribunal members or designate a third party for this purpose. If a third party is designated in the arbitration agreement, the parties should make sure that such a body exists and is likely to continue to exist; if it cannot be identified or no longer exists when the dispute arises, the commencement of the arbitration may be delayed or frustrated altogether, as there will be no one with the power to appoint the tribunal.
In determining the number of arbitrators (usually one or three), the complexity of the dispute and amounts at stake should be taken into account. A workable option would be to simply state that the dispute would be resolved by one or three arbitrators and reserve the decision as to the number to the time when the dispute arises.
Specifications regarding arbitrators’ qualifications, language, and nationality should be made with caution: define these requirements too narrowly and there might be an insufficient pool of arbitrators from which to choose, define them too broadly and the appointment process becomes complicated. Unworkable appointment criteria may frustrate an arbitration clause unless the parties later agree to modify their agreement.
Full Article is available here: Why arbitration? A basic overview and pointers.
See also: Practical Tips For Effectively Conducting An Arbitration.