Arbitration: the Good, the Bad and the Ugly
By Nick Scott, Memery Crystal
International commercial arbitration is fast becoming the most popular means of dispute resolution for multinationals, particularly where one of the contractual counter-parties is a government or parastatal entity. The London Court of International Arbitration recorded a new high of 301 cases in 2013, up 10% from 2012, which may be down to arbitration’s more effective international enforcement regime. Figures for 2014 are not yet available but are thought likely to continue this upward trend. This is a high-level summary of the advantages and disadvantages of arbitration when compared with litigation in England, which should be considered by in-house lawyers and commercial decision makers when deciding on the most appropriate dispute resolution procedure at the time of entering into a contract.
Broadly speaking, the question is: are there assets to enforce against in the EU or not? English High Court litigation is preferable if your counterparty has assets in the EU because EU legislation means both the process and the enforcement of High Court Judgments are relatively quick and simple. Arbitration is preferable against non-EU counterparties as that EU legislation does not apply.
Arbitration: What is it?
Arbitration is a private procedure whereby either one arbitrator, or a panel of three arbitrators, is appointed by the parties to make a binding decision on the dispute; effectively, a private trial, although the arbitration process tends to be less formal than courtroom litigation and tries to minimise the more adversarial elements.
Arbitration: The Good
- The near global enforceability of arbitration awards is its biggest advantage, and when deciding between litigation or arbitration you should consider:
(i) Where your counterparty’s assets are located; and
(ii) Whether you can enforce an English Court Judgment there.
- If your counterparty’s assets are in America, choose arbitration because although it is theoretically possible to enforce an English Court Judgment there, enforcement of an arbitration award is easier under The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This governs the enforcement of arbitral awards in 149 foreign jurisdictions and can be used where the counterparty’s assets are outside the EU.
- If your counterparty’s assets are, for example, in Germany, choose litigation because a judgment from a court in one EU member state can be enforced in all other member states. The enforcement of English Court Judgments in non-EU countries is substantially more complicated and limited in scope.
- Arbitration hearings are only attended by the tribunal, the parties, and their representatives, and the parties can agree to keep an award confidential. By contrast, English courts operate a policy of open justice and judges are intensely reluctant (unless dealing with family or national security matters) to hear cases in private.
- Evidence given to the Tribunal will invariably remain confidential, but if one or both of the parties is a listed company and the arbitration is for a material amount, the fact of the arbitration, or the amounts in issue and the result, will have to be disclosed to the relevant stock exchange.
- Where a dispute raises technical or scientific issues of fact the parties can choose a tribunal panel with relevant experience; however, as with litigation, it is usual for parties to appoint independent specialist experts.
- Arbitration takes places in a neutral forum selected by the parties, which alleviates any potential fear about the impartiality of the courts in a foreign jurisdiction, particularly where the domestic counterparty is the government or a parastatal entity of it.
- Opportunities to appeal an arbitration award are very limited, which promotes the finality of decisions.
Arbitration: The Bad
- Arbitration is typically more expensive than litigation as there are additional costs payable, including the arbitrators’ fees (particularly where there is a panel of three), administrative expenses and the venue hire, compared to a relatively modest court fee of a few thousand for access to judges of the highest calibre and court rooms, regardless of how long the dispute lasts.
- Arbitrators don’t have the same powers as Courts to make the parties adhere to the pre-trial timetable.
- There is high demand for the top international arbitrators, and their busy schedules can mean a wait for an arbitration hearing.
- Arbitration may not be suitable where a dispute involves a complex structure of contracts between several different international parties, as third parties cannot be joined to an arbitration. In litigation, parties can easily be joined in an action whether they consent or not. Institutional rules do make some provision for these situations but the solutions are “rough and ready”.
When considering whether to litigate or arbitrate disputes arising from your contracts, the key question to ask at the outset of the deal is: where are the assets if a dispute arises? The optimal approach will depend on this, the type of contract and the identity of the counterparty.
Nick Scott, Partner
Memery Crystal LLP, 44 Southampton Buildings, WC2A 1AP London, United Kingdom
T: 44 (0) 20 7400 5823
published: June 2015