Arbitration versus litigation
October 2013 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
This article provides an overview of the relative strengths and weaknesses of international arbitration compared to litigation. It aims to assist the reader into coming to achoice as to which dispute resolution mechanism would be more suitable in the circumstances of the particular case.
Advantages of arbitration
The composition of the tribunal. The advantages of arbitration over litigation generally flow from its theoretical basis as an instrument of party autonomy. Unlike the panel of judges in the court system, the composition of an arbitral tribunal is normally determined by the agreement of the parties. The typical appointment system for a three-member arbitral tribunal is for each party to appoint a single arbitrator and the two arbitrators to then appoint a third, presiding arbitrator. It is therefore possible for the parties to appoint a tribunal that is highly specialised in the subject matter of the dispute. However, the limited number of leading arbitrators in the world has led to concerns regarding their independence and the risk of conflicts of interest. These concerns are assuaged by independence requirements existing under all main arbitration rules and laws.
Choice of seat. The parties may prescribe the seat of the arbitration, which will normally be in a country other than the parties’ nationalities, to ensure neutrality. The seat determines the nationality of the courts that have supervisory jurisdiction over the arbitral process, including in respect of possible challenges to the arbitral award.
There are two caveats to the benefits of being able to agree on a neutral seat. Firstly, these benefits can be largely matched by including an exclusive jurisdiction clause in the contract providing for disputes to be heard in the courts of a third-party nation. The benefits associated with the dispute being heard in a neutral venue is therefore not exclusive to arbitration. Secondly, mandatory rules of the law of the seat (or lex arbitri) concerning, in particular, arbitrability may preclude certain matters from being arbitrated.
Procedural matters. A third aspect to party autonomy is the parties’ ability to decide how the arbitral proceedings should be conducted. Most arbitral institutions allow the parties to amend their preset arbitral rules. This is in stark contrast to litigation before national courts, which are invariably subject to mandatory rules of procedure.
The ability to adapt arbitral procedure may be particularly useful where a party requires its case to be fast-tracked. In this case, the parties may impose a tight timeframe for the arbitral procedure, or, for instance, undertake a ‘baseball’ or ‘final offer’ arbitration, in which each party submits a final offer to the arbitral tribunal to be selected as its award.
However, an expedited arbitral process may be frustrated by an obstreperous opponent, the unavailability of the arbitral tribunal, or the mandatory rules of the lex arbitri which may impose procedural limitations in order to ensure due process and the right of each party to make its case.
Confidentiality. While national courts may protect confidentiality in particularly sensitive cases, the default position is for court proceedings to be public. By contrast, arbitral proceedings normally take place in private.
Nevertheless, absent a formal confidentiality agreement, it is difficult for arbitral tribunals to impose any penalty for parties breaking the confidentiality of the proceedings. Furthermore, the parties to an arbitration often need the assistance from the courts, either to seek an interim remedy, or to enforce an award. In both instances, the appearance of the parties in national courts will lead to disclosure of at least the existence of the dispute.
Finality. Another advantage associated with international arbitration is the certainty granted by the initial award.
Most jurisdictions limit the supervision of national courts to cases where the tribunal lacked jurisdiction or independence, or had made a manifest error in its application of law. National arbitration laws generally provide for a high threshold for applicants seeking to overturn an arbitral award.
A challenge to an arbitral award does not automatically stay the right to seek enforcement, but, if successful, can be far more devastating than a successful challenge to a court decision. Whereas the latter may simply result in its remand to the inferior court, or a revision by the superior court, a review of an arbitral award will result in its annulment or vacation.
Enforceability. Perhaps the most important reason why parties elect arbitration over litigation in international contracts is the comparative ease of the enforcement process. The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards currently has 148 state signatories and obligates each signatory to recognise and enforce arbitral awards rendered in the jurisdiction of another signatory state, subject only to the rules and requirements of this Convention.
In contrast, the enforceability of national court decisions is governed by a few bilateral and multilateral treaties, none of which has the breadth of coverage of the New York Convention. Thus, enforceability is normally left to national laws.
The nearest equivalent to the New York Convention in respect of national court decisions is perhaps the Brussels Regulation which governs the reciprocal enforcement of judgments within the limited group comprised of the 27 members of the European Union, plus Iceland, Norway and Switzerland.
Shortcomings of arbitration
Arbitrability. The first downside to arbitration is that in some jurisdictions certain subject matters (e.g., labour, corporate, or antitrust disputes, or matters where parties may seek punitive damages) are simply not arbitrable. If the matter is non-arbitrable, the only option is to litigate.
Multiparty disputes. It can be extremely difficult to arrange arbitration in a case involving multiple parties. While it is possible for a party to agree ex post facto to join an arbitration, such cooperation is rarely forthcoming once a dispute has arisen.
Even where the parties are all bound by a single arbitration agreement, the possibility of multiple parallel proceedings is ever present. Unless the arbitration agreement or applicable rules provide for a tribunal to force consolidation, this may rest on the agreement of all the concerned parties and arbitrators. The difficulty of consolidating parallel proceedings in multiparty arbitrations risks an inefficient and expensive procedure and the possibility of inconsistent awards.
Interim relief. In a few jurisdictions, including chiefly Italy, arbitral tribunals do not have the power to grant interim relief.
In any event, arbitral tribunals are poorly positioned to grant such orders. The first reason is that there is inevitably a delay in the constitution of an arbitral tribunal, unlike a court which is always in session. The second problem flows from the fact that arbitral awards require enforcement in national courts and this extra step runs counter to the urgent nature of interim relief.
National arbitration legislation often permits parties to apply to court to seek interim relief prior to the constitution of an arbitral tribunal or during the proceedings. However, this step would require the public disclosure of the dispute, thus undermining one of the benefits of choosing arbitration.
Evidentiary powers. Document discovery varies drastically according to jurisdiction. The European, civil law-based jurisdictions tend to favour limited (if any) document discovery, while the US supports wide-ranging document discovery and England falls somewhere in the middle. An attempt has been made by the IBA to institute a collection of good-practice guidelines, whose touchstone for discovery is relevance (the IBA Rules on the Taking of Evidence). While the IBA Rules represent a compromise between civil and common law thinking, they only apply by agreement of the parties, and their interpretation may be influenced by the nationality of the arbitrators.
Arbitral tribunals also lack coercive power to compel document discovery and may only draw adverse inferences from a party’s failure to comply with a document production order. Conversely, failure to comply with a court order requiring document production may result in a contempt of court and possible civil or criminal sanctions.
Shortcomings that are unique to arbitration. Parties can seek to delay the arbitration in ways that would not be possible in litigation. Firstly, a party may disrupt the constitution of an arbitral tribunal by failing to nominate an arbitrator in a timely fashion, or by contesting the appointment of arbitrators. Secondly, a party may seek to seize a national court before the commencement of an arbitral proceeding by filing a suit for an anti-arbitration injunction. In such a case, even if the court decided to allow the tribunal to determine its own competence (pursuant to the kompetenz-kompetenzprinciple), there would still be another hurdle to jump before the arbitral process could get underway. Likewise, in litigation a party may seek to seize a court in another jurisdiction in the hope of delaying the proceedings.
Lack of res judicataeffect. Res judicata is a doctrine of preclusion, preventing a party from bringing a claim in respect of a matter that has already been determined by a competent authority. The principle of judgments having preclusive effect is generally accepted in all developed states, but not in international arbitration.
Lack of stare decisis. Stare decisis is a common law doctrine that a principle established in a previous legal case is binding or persuasive on courts subsequently dealing with the same principle. This doctrine plays a role in the national legal system of the substantive law governing the arbitral matter, and should equally be applied by the arbitral tribunal. There are, however, two caveats. Firstly, the possibility of appealing an arbitral award that misapplies a binding precedent as opposed to a decision of an inferior national court is much narrower (and even precluded, if the parties so agree). Secondly, although arbitrators frequently refer to arbitral awards in making a decision, these precedents are not considered binding. To a certain extent, this problem is moot as the vast majority of arbitral awards are confidential and therefore cannot be considered by the parties in assessing their legal positions.
Cost of arbitration. It was long-said of arbitration that it was cheaper and quicker than litigation, but this is not always the case. Arbitral disputes have been known to last years, with subsequent challenges related to jurisdiction and enforcement relatively common. Equally, whereas court judges are publicly funded, the fees of arbitrators (and institutions where applicable) have to be borne by the parties, as do all other costs of the arbitration (such as the hiring of a venue and the fees for legal counsel and experts).
Reaching a decision between arbitration and litigation
As a short, non-exhaustive checklist, the following matters should be taken into consideration to choose arbitration over litigation: (i) the need for documentary discovery from counterparty or third parties; (ii) the need to cross-examine the opposing party’s executives – in arbitration, the general rule is that only individuals submitting a witness statement can be forced to testify; (iii) the need for third party witnesses – in arbitration, third party witnesses cannot be compelled to attend; (iv) the need to consolidate related-proceedings – if this is the case, litigation may be preferable, or great care should be taken in the drafting of the arbitration agreement; (v) the need for interim relief – interim relief is easier to obtain from and enforce in litigation, although the parties to an arbitration may be able to seek interim relief from a national court; (vi) the need for a final injunction – while arbitral damages awards may be enforced with relative ease, it is difficult for an arbitral tribunal to supervise the award of a negative injunction; and (vii) the need to enforce the award in a jurisdiction other than the location of the hearing – if a counterparty’s assets are mainly based outside the jurisdiction of the dispute, arbitration is likely to be the better option as the parties may benefit from the New York Convention.
Ferdinando Emanuele and Milo Molfa are international arbitration specialists at Cleary Gottlieb Steen & Hamilton. Mr Emanuele can be contacted on +39 06 6952 2604 or by email: email@example.com. Mr Molfa can be contacted on +44 (0)20 7614 2212 or by email: firstname.lastname@example.org. The authors wish to thank Ludovica Marvasi for her assistance in the preparation of this paper.
© Financier Worldwide
Ferdinando Emanuele and Milo Molfa
Cleary Gottlieb Steen & Hamilton