When a dispute arises between commercial parties, the ‘normal’ forum for dispute resolution is to litigate through the courts, but it is worth knowing the alternative forums available and their advantages.
We will consider litigation and arbitration as the ‘most common’ dispute resolution forums in commercial contracts. In our next article, we will look at alternative dispute resolution in more detail.
Domestic and International Contracts
Two English companies would ordinarily choose the courts of England and Wales. However, the negotiation can be more complex in respect of international contracts between parties in different countries; each may prefer their home courts and domestic law.
This can lead to uncertainty and disputes around the appropriate forum and applicable law. It is for this reason that dispute resolution clauses in commercial contracts became paramount and exclusive jurisdiction clauses commonplace. By exclusive jurisdiction, we mean the parties agree the dispute resolution forum and applicable law (when they enter into the original contract).
Dispute Resolution Clause
When negotiating a dispute resolution clause in a contract, the parties should consider whether litigation, arbitration or some other alternative dispute resolution forum is appropriate. If the parties decide on litigation, then the dispute resolution clause should define both the applicable court and law. Ordinarily, if the dispute resolution clause provides for the courts of England and Wales, it would also be stated that English law was to apply. However, whilst unusual, the parties could choose the English courts as the appropriate forum and then agree that the applicable law be that of another jurisdiction.
If the parties choose litigation and define the forum as the courts of England and Wales with English law applicable, then the Civil Procedure Rules would ordinarily apply (subject to any specialist procedures which may apply within a particular judicial division.) There is very little procedural flexibility in this instance.
An arbitration clause will not only decide on a jurisdiction (by designating the “seat” or designated city / country of the arbitration) but also the applicable rules. These may be the rules of an institution (e.g. the London Court of International Arbitration (“LCIA”) Arbitration Rules) or the legislation of the applicable seat (e.g. for England, this would be the Arbitration Act 1996).
Litigation vs Arbitration
There are a number of advantages that arbitration can have over litigation. However, it is important to examine each supposed advantage within the context of every individual transaction. Factors to consider include:
1.Enforcement – ease of enforcement is often an important deciding factor in favour of arbitration.
The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides an established enforcement regime for international arbitration awards. The majority of states have signed up to the New York Convention, and there are very few grounds for a signatory state to refuse to recognise an arbitration award. There is no real equivalent for the enforcement of court judgments. Legislation in each state may allow for similar enforcement, but this is very dependent on each state’s own rules.
It is essential to check the position for cross-border enforcement of judgments and arbitral awards before finalising the dispute resolution clause.
2.Certainty – as with an exclusive jurisdiction clause, an effective arbitration clause will also give the parties a degree of certainty. It is particularly useful where there is a cross-border element to the dispute. An effective clause should sidestep entirely the complex rules of private international law governing jurisdiction.
3.Procedural flexibility – arbitration can allow the parties to tailor procedures to the needs of a particular dispute and is generally thought to allow the parties more freedom to agree a suitable procedure. It is also thought that arbitration has a greater influence over procedure than is possible in court proceedings. That being the case, many commercial parties tend to opt for institutional arbitration and simply adopt the standard rules and procedures of their chosen institution (e.g. the London Court of International Arbitration).
Generally, in arbitration, procedural deadlines can be more flexible and informal. This can be an advantage for the parties in terms of reducing arguments and applications over time extensions and deadlines, but it can be frustrating if one party continually fails to comply with the procedural timetable. In litigation, procedural deadlines are more rigid, and the courts have greater powers (and the appetite to use those powers) to penalise parties in respect of breaches of procedural deadlines.
4.Expertise – parties can choose their arbitral tribunal. This allows them to choose arbitrators with the relevant technical or other expertise for the dispute.
5.Privacy – arbitration hearings are usually held in private and the fact that a party is involved in arbitration proceedings is confidential. In contrast, the fact that a party is involved in English litigation is a matter of public record.
English law also recognises an implied duty of confidentiality which prevents the disclosure to third parties of most documents produced or disclosed in arbitration. However, different jurisdictions will have different rules regarding the duties of confidentiality in respect of arbitration, so it is advisable to check the relevant position before completing any arbitration agreement.
6.Neutrality – in arbitration, the parties are able to refer their disputes to a neutral forum. This is often attractive to commercial parties, especially if they are wary of referring disputes to the home courts of the other party. Arbitration will also enable the parties to ensure that the composition of the tribunal, as well as the seat of the arbitration and the location of hearings, are neutral.
7.Cost – arbitration is sometimes cheaper than litigation, particularly where the parties achieve procedural efficiencies by agreement. However, this is not always the case. In a court claim, there are some court fees, but essentially the parties obtain the services of the court and the judge for free. In arbitration, the parties need to pay the fees of the tribunal plus administrative costs and these can be substantial. They will also need to deal with the practical arrangements and the organisation for any hearing.
8.Delays – sometimes arbitration is a quicker way of resolving disputes than litigation. Significant delays can still occur in arbitration, particularly in cases where one party deliberately breaches procedural deadlines and seeks to delay proceedings. The powers of the arbitration tribunal to deal with such issues are less than those of the courts.
9.Finality – the opportunities for appealing or challenging an arbitration award are more limited than those relating to court judgments. Therefore, the parties are less likely to become caught up in lengthy appeals. Of course, this is not such an advantage if the arbitral tribunal does not decide in your favour.
10.Multiparty disputes – the right to arbitrate is contractual and comes from the arbitration agreement. This means that there is no power to join third parties unless all the parties, and the third party, agree. Joining a party could save costs, however most parties will not agree for tactical reasons. This can result in a cumbersome and inconvenient procedure with a risk of inconsistent findings and could prejudice settlement.
Arbitration cannot easily accommodate class action litigation.
11.Summary determination – although an arbitral tribunal can determine claims and defences summarily, in practice, they are often less willing than a court to do so. English courts on the other hand can be quite forceful in disposing of meritless claims or defences at an early stage in proceedings.
12.No precedent – arbitration awards are generally confidential to the parties. They do not give rise to any binding precedent on other parties. In cases where a final and binding ruling on a point of law and/or construction is required, litigation will generally be the better option.
There is no one size fits all.
The appropriate dispute resolution forum should be a matter for serious consideration and negotiation between the parties. However, it often gets overlooked and deemed less significant than the substance of the commercial contract.
The parties may also prefer some other form of ADR. This may be appropriate in specialist contracts or industry sectors. We will consider this in our next article.