Weighing up litigation, arbitration and mediation
December 2018 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
December 2018 Issue
The first point to make is that the time to weigh up whether it is best for disputes to be dealt with in litigation, arbitration or mediation (or a mixture) is when the contract is drafted. This may sound like a statement of the obvious (which it is), but in the rush to get a deal done the dispute resolution clause is often not a priority. There is perceived to be no money riding on it. However, there may be real financial implications if there is a dispute, so it is important to consider the options carefully when the contract is being negotiated and choose wisely.
Mediation, unlike litigation or arbitration, is a consensual procedure for resolving disputes and since the parties may not reach agreement it is very important that a backstop of either litigation or arbitration is imposed, even if there is a mediation clause. In mediation the parties attempt to find an amicable solution to their dispute, with the assistance of an independent third party, namely, the mediator.
The mediator will generally have trained in mediation but is not necessarily a lawyer. He or she will point out to the parties the disadvantages of continuing with the dispute in terms of the costs that are likely to be incurred by each side and the management time wasted and will try to persuade them to settle. A mediated settlement is generally not on terms that are ideal to either party because it will represent a compromise, but it does at least avoid the risk and costs of litigation or arbitration.
It can be useful to include a provision in the contract that any dispute must be mediated before proceedings are commenced in arbitration or court. However, even without such a clause, the parties are free to mediate at any time (and indeed will be encouraged to do so if the dispute goes to court). The inclusion of a clause, paradoxically, may make it less likely that the dispute will be settled in mediation, if it is seen as a formulaic step that simply has to be passed before litigation or arbitration, depriving it of any real meaning. The other factor to bear in mind is the cost of mediation.
If successful, mediation avoids substantial legal costs, particularly if it takes place early in proceedings. However, if the mediation is unsuccessful, it adds an additional layer of cost to dispute. That cost is not necessarily without benefit even if the dispute does not settle, as each side will have a better idea of the strengths and weaknesses of the other side’s case, issues may be clarified or narrowed, and that may lead to a settlement at a later stage. The question of whether it is prudent to impose mediation in a dispute resolution clause is therefore open.
The main question when considering any dispute resolution clause is not whether it should include a provision on mediation but whether it should provide for litigation or arbitration and further which courts and which arbitration procedure should be used.
The most important issue when considering whether to choose litigation or arbitration is whether, in the event of a dispute, it will be possible to enforce the court judgment or arbitration award against the assets of the opposing party. This is where court judgments can be at a disadvantage. English court judgments are enforceable under treaty-based regimes in 79 states (and this number may go down after Brexit). It is possible to enforce judgments in more states, but without the benefit of a reciprocal agreement, the outcome of enforcement proceedings is not certain.
Arbitration awards are, on the other hand, enforceable in 159 states under the New York Convention. Failure to consider this issue upfront when the contract is being negotiated can cost a great deal if there is a dispute. There is no point in having an award or judgment if it cannot be enforced. The question of where the other side’s assets are located is the main element to be considered. If choosing litigation, are the judgments of the court of the state that will deal with the dispute recognised in the jurisdiction where the assets are located? If not, the claimant may find itself with no real recourse.
This issue may not arise, for example, if both parties are based in England and their assets are located there. In these circumstances, arbitration would seem to offer little enforcement advantage over litigation. The issues are completely different when the parties to the agreement are based in different jurisdictions. Another advantage of arbitration is the neutrality of the forum. In many cases neither side will accept the jurisdiction of the courts where the other is located, fearing that they will be more likely to be biased in the opponent’s favour.
Arbitration can offer an alternative. If neither party is based in the UK, English courts are sometimes viewed favourably by the parties as a neutral venue with good court administration and honest, skilled judges. However, the question of enforceability of any court order in those circumstances is of paramount importance.
Cost is another issue to be kept in mind. Administrative fees are lower in court. For example, it would cost £11,000 in court fees to raise a £5m claim in the High Court, whereas it could cost about $300,000 in administrative expenses and arbitrators’ fees to raise a claim for the same value in International Chamber of Commerce (ICC) arbitration proceedings before a three member tribunal, because the ICC calculates its fees on an ad valorem basis (i.e., based on the amount in dispute). In addition, in common with some other institutions, the ICC requires a percentage of the fees to be paid up front, a burden often borne by the claimant.
This payment should be shared by the parties (and costs are usually allocated between the parties in the normal way post-award) but the claimant will ultimately have to pay the full amount for the arbitration to continue if, as is commonly the case, the respondent fails to pay its share. The London Court of International Arbitration (LCIA) requires a pre-estimate of the arbitrators’ fees to be paid, but they are payable in tranches based on hourly rates rather than a percentage of the claim. For shipping related disputes, the London Maritime Arbitration Association (LMAA) operates more like the English court system and there is very little by way of upfront fees, which means that the arbitration costs for cases settled at an early stage are quite low.
On the other hand, the LMAA does not exist as an institution to give guidance or administrative support in the same way as the ICC or LCIA. The fees of English lawyers or party-appointed counsel will be similar whether the claim is pursued in arbitration or before English courts. Another important element that can swing parties in favour or against a particular procedure is who will be deciding the claim. The experience of judges in the courts in the UK is second to none. However, parties may feel that they do not have the necessary practical expertise in the industry that would be the subject of the dispute.
Another perceived advantage of arbitration is that the parties are able to appoint their own arbitrators. However, the days of each party or their solicitors appointing their favourite arbitrator on repeat are numbered. The 2014 International Bar Association (IBA) ‘Guidelines on Conflict of Interest’ have flagged appointment of the arbitrator by either one of the parties or one of the law firms on two or more occasions during the last three years as something that has to be disclosed by the arbitrator as it may give rise to doubts as to the arbitrator’s impartially or independence.
Arbitration, as we have seen, can be more expensive than litigation in English courts. It can also be slow. Dealing with the bureaucracy of the institutions can be expensive and time consuming. On the other hand, ad hoc arbitration (without institutional involvement) can be much cheaper. The only fee payable will be for that of appointing the arbitrator (and even that can be avoided if the parties choose to appoint the arbitrator themselves rather that leaving it to an appointing body). However, this presents a whole host of other difficulties. If no procedure is agreed at the time of the contract, it is often difficult to agree a procedure at the time of the dispute, particularly as one of the parties may have an incentive to delay finding any solution. Another disadvantage of ad hoc arbitration is that it is not as widely recognised since several countries only recognise institutional arbitration.
It is worth noting here the consequences of failing to choose arbitration or litigation in the courts of a particular state as the method of dispute solution. If there is no arbitration clause any disputes will end up in court, and, if there is no exclusive jurisdiction clause, each party leaves itself open to forum shopping by the other and possibly some nasty surprises relating to courts that are prepared to deal with a case, however tenuous the connection with the dispute.
In conclusion, in commercial contracts, where enforcement would take place outside the UK, check very carefully whether an English court judgment is enforceable before agreeing to the exclusive jurisdiction of English courts. If opting for arbitration, consider the pros and cons of each arbitral institution carefully before deciding which is best for the contract. If choosing an ad hoc solution, make sure an award is enforceable in the jurisdiction where assets are located and perhaps choose an institution to appoint the arbitrator and set out the procedural rules to be used in the arbitration clause. Finally, any choice is better than no choice.
Marie Kelly is a partner at Norton Rose Fulbright LLP. She can be contacted on +44 (0)20 7444 5754 or by email: email@example.com.
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Norton Rose Fulbright LLP