Sunday, August 23, 2009

What are the advantages and disadvantages of arbitration when compared with Court litigation ?

If you have ever had your day in court, you would probably have wished you had never been a party to litigation. The incessant delays, complex procedures, lack of direct involvement and heavy costs are enough to put one off seeking justice in this manner. It would seem that a trial is a rather effective deterrent to seeking justice!

The commonly held view is that arbitration, a form of alternative dispute resolution outside the formal structure of law and court procedure, would provide a suitable alternative that was just, accessible, efficient, timely and effective. The matter is referred to a third party, either an arbitrator or a tribunal consisting of three arbitrators, who will grant an award which the parties are obliged to honour. Should a party fail to honour the award, the other party may still seek relief from the courts.

This essay will discuss some of the advantages of arbitration over court litigation which are most important to the parties and the reasons why they are so. Some of the disadvantages will also be highlighted.

Efficacy

There are two elements to efficacy in the context of arbitration : firstly as a speedy means of resolving conflict and secondly maintaining the continuity of relationship between the parties having the dispute.

Section 1 of the Arbitration Act 1996 practiced in England, Wales and Northern Ireland sets out clearly that the objective of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense. Because arbitration does not go through the inflexibility of scheduling inherent in the court system and arbitrators in principle have more flexible schedules than judges here is less likelihood of there being a delay. Parties have greater control over the timing of the arbitration proceedings.

Arbitration also leads to faster resolution because the proceedings are less formal than a court case. There is also only a limited right of appeal against arbitration awards thus ensuring that the dispute is not prolonged by a long appeal process which can mean swifter enforcement and less scope for a party to delay matters. For the parties the quicker a dispute is resolved, the faster they can focus on their core business.

Court proceedings tend to terminally rupture business relationships where the courts act as an umpire over the lawyers who dictate the intention of the parties resulting in the predominance of a boxing ring culture over a solution seeking culture. Litigation encourages a desire for vindication and public acknowledgement of a wrong suffered.
Ultimately there is one winner and one loser which is not the preferred outcome for parties having a high degree of mutuality and interdependency. Therefor parties which are very closely interlinked and want to maintain their relationship would prefer the arbitration route over court litigation.

Flexibility

Litigation is a highly formalized process with specialized rules and requires compliance by both parties failing which the court proceedings are held up. Arbitration is less formal than court proceedings and the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate if the parties fail to agree on the procedure to be followed (Article 19 of the Model Law on International Commercial Arbitration).

The arbitration route allows the tribunal to adopt the inquisitorial system which involves search for the truth largely through the tribunal’s own investigations if it feels it is necessary. The advantage of the inquisitorial system is evident from the strong support for it at the level of the Small Claims Courts in the UK where arbitrators now take a more interventionist approach.1 The adversarial method of proceeding inherent in the Common Law system practiced in much of the English speaking world takes a longer time to gather evidence than the inquisitorial system.

Parties are attracted to the less formal nature of arbitration which encourages a speedier and hence less costly way of settling disputes. However, lately, arbitration has been criticised for copying court litigation and as arbitration has developed, the procedures too have become as complicated. It is hoped that the UNCITRAL Notes on Organizing Arbitral Proceedings 1996 will weed out potential problem areas.

Ability to Select Venue, Seat and Language of the Arbitration


The flexibility of arbitration extends to the freedom to choose the venue of the arbitration whether in the contract’s arbitration agreement itself or at a later stage. This decision allows parties from different legal jurisdictions and different legal systems to pick a neutral venue or a venue that is aritration-friendly or convenient for them.

The parties may also decide on the seat of the arbitration i.e. the legal jurisdiction to which the arbitration is tied. The seat dictates which national law governs the procedure. The seat of arbitration need not be in the same country as the venue, although in practice they are often the same. The seat of the arbitration is significant since it will normally determine the procedure or rules which the arbitration adopts, and the courts which exercise jurisdiction over the seat will have a supervisory role over the conduct of the arbitration. By selecting a given state as the place of arbitration, the parties place the process within the framework of that country’s mandatory national laws applicable to arbitration.

For parties of different legal jurisdictions having a single seat avoids the complications relating to conflicting laws. For example London remains one of the most popular jurisdictions for international arbitration due to the availability of fairly extensive supportive measures from the court, a lack of court intervention restricting party autonomy and a comprehensive regime in the form of the 1996 Act.

There will be certainty as to the extent by which the national court will support or intervene in the arbitral process and the extent of judicial review available to the parties. The finality of the award will also be certain and between commercial parties, finality is a priority.

Agreeing to arbitration also allows the parties to pick the language in which they would like the proceedings to be conducted. Unlike the situation where a dispute is litigated, the place of arbitration does not predetermine the language and parties can agree on the language that is most convenient.

Parties who desire more control of the setting in which the dispute is conducted as opposed to allowing the court system to determine would prefer the arbitration route.

Uniformity of the Law

As arbitration becomes an increasingly popular form of alternate dispute resolution this had led to more countries legislating laws which govern the conduct of arbitration held in that country based on the UNCITRAL Model Law on International Commercial Arbitration 1985 and the UCITRAL Arbitration Rules 1976. As a result there is growing uniformity of legislation pertaining to arbitration around the world.

Parties would feel secure knowing that the seat of arbitration that has legislation based on the Model Law would follow certain general principles outlined in the Model Law.

Enforcement of the Award

In terms of enforcement, the provisions of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) make arbitration awards generally easier to enforce abroad than court judgments. There are more than 140 signatory states to the convention that have agreed to recognise and enforce awards made in territories of other signatory states.

Due to the international recognition and support that arbitration has achieved, there is widespread acceptance that agreements to refer disputes to arbitration should be upheld by the courts and awards enforced, regardless of the jurisdiction in which the agreements were made. The growth in cross-border commerce has made this increasingly important.

Access to the courts remain open to the party seeking relief should the other party fail to honour the valid award of the arbitrator in respect of matters referred to him in accordance with that arbitration agreement. Thus a dissatisfied party has recourse to the courts if he or she so wishes.

Costs

The complex procedures involved in court litigation means heavy legal costs which may be unsustainable for private individuals and small companies. Therefor in simple cases, the lower cost of arbitration can be an attractive inducement to these parties to arbitrate.

However it appears the new arbitration bureaucracy has replaced the old judicial bureaucracy. The time and expense of paper and face-to-face meetings unnecessarily contributes to the costs in many cases. There is a big question mark as to whether the cost of arbitration is lower than the cost of going to trial for more complex cases. Where a tribunal is involved, arbitrators’ fees can be relatively expensive. Apart from the arbitrator’s fees there are other incidental costs such as hire charges for the venue. Therefor costs may no longer be a factor to be considered by the parties in their choice to go for arbitration

Expertise and Knowledge

An arbitrator may have or members of a tribunal may consist of those who have the necessary qualifications and technical expertise to hear a case. This point carries even more weight in the case of a tribunal where parties are allowed to name an arbitrator of their choice, preferably one who has intrinsic knowledge of the case at hand. In litigation a judge may not necessarily understand the complexities involved in a shipping case for example. Furthermore in courts below the appellate level, judges sit alone which may further exacerbate the situation where specialist knowledge is required. Parties may come out of the courtroom feeling they may not have had a fair trial because of this.

The importance of arbitration is evident in the maritime and construction sectors where it is common, if not standard practice for commercial contracts to contain express clauses referring any future disputes to arbitration.

Privacy and confidentiality

There is an implied right of privacy in the arbitration process keeping matters private between the parties involved. The advantage over litigation which is a wholly public affair is that firstly outsiders do not get access to any potentially sensitive information and secondly the parties to the arbitration do not run the risk of any damaging publicity arising out of reports of the proceedings.

However in a recent Court of Appeal decision in England (Emmott v Michael Wilson & Partners Limited [2008]), the court acknowledged that parties to arbitration in England may generally be allowed, and may even be required, to disclose details of the arbitration where:

a.) Parties to the arbitration expressly or impliedly consent;
b.) Disclosure is reasonably necessary to protect legitimate interests of an arbitrating party (including requirements of public reporting, fiduciary obligations, auditing requirements, disclosures to insurers and disclosure in court applications);
c) A court permits disclosure (by order or leave); or
d) The interests of justice require disclosure and (perhaps) where public interest requires disclosure. 2

Disadvantages of arbitration over litigation

Subject Matter Not Capable of Settlement

The subject matter of the dispute is not capable of settlement by arbitration under the law of the relevant state e.g. criminal matters or matters of public law an example of this would be intellectual property rights. In some disputes, parts of claims may be arbitrable and other parts not. For example, in a dispute over patent infringement, a determination of whether a patent has been infringed could be adjudicated upon by an arbitration tribunal, but the validity of a patent could not as patents are subject to a system of public registration. An arbitral panel would have no power to order the relevant body to rectify any patent registration based upon its determination

Additionally an arbitrator may not have the power to grant remedies that a court can. There is support for the view that a court will refuse to stay proceedings in support of arbitration if the arbitrator cannot award the remedy claimed. In the case of Hashim bin Majid v. Param Cumaraswamy, an application to stay court proceedings was refused on the grounds that one of the remedies claimed by the plaintiff was a dissolution of the partnership and the court was of the view that this was not an issue that could be decided by an arbitrator.3

Award Not Necessarily Based on Rules of Law

An arbitrator may make an award based upon broad principles of “justice” and “equity” and not necessarily on rules of law or evidence. There is also the danger of unknown bias and competency of the arbitrator unless the arbitration agreement set up the qualifications or the organization that administers the arbitration, has pre-qualified the arbitrator.

Lack of Precedents

Since arbitration decisions are not public there is a lack of access to precedents on previous arbitration decisions. Additionally unlike litigation, the stare decisis rule does not apply. These two factors contribute to less certainty by the parties on the outcome of arbitration.

Non Adherence to Court Rules and Rules of Evidence

When the rules are not strictly adhered to this may lead to the cases where certain evidence may be admitted (for example hearsay) which is strictly not allowed in litigation due to the unavailability of cross-examination to test the accuracy of the statement.

Conclusion

Choosing which course of action to pursuit differs from one case to another. Essentially the most important factors are that arbitration offers a self help route in settling disputes outside the court system where the parties are in greater control over the proceedings.

Generally arbitration is a more efficient, less procedural and cheaper route to solving disputes although this may not necessarily be the case as arbitral proceedings become more complex.

The advantages of arbitration are more evident in cases where expertise in a certain area are required. Parties who want to maintain a harmonious relationship and who wish to have their dispute out of the public eye would also prefer the arbitration route.



































1J.Baldwin, ‘Litigants’ Experiences of Adjudication in the County Courts’, 18 Civil Justice Quarterly, January 1999, pp. 12-40 at 20.

2M.Sindler, ‘Litigation, dispute resolution and arbitration: Privacy matters’, Legal Week, July 2008.

3Hashim bin Majid v Param Cumaraswamy (1993) 2 Malayan Law Journal 20.

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