The default method of having a dispute resolved is litigation in a national court (normally open to the public), which leads to an enforceable judgment. In many cases contracting parties can agree to arbitration, which is similar to the parties selecting their own private Judge for judgment only. Some topics are not capable of being decided by an arbitrator, such as criminal guilt, marital status, or the validity of a patent, because those can only be determined by the State (through its courts). The subject-matter of most arbitration agreements is commercial: performance and payment.

Arbitrations in which the parties, the law and the issues are all within one jurisdiction (such as England and Wales) are called “domestic” arbitrations. By contrast, international arbitrations require at least one international element of some sort, owing to the recent revolution in transport, communications and information technology, the growth in international trade and contracts, international arbitrations are becoming increasingly common.

Arbitration tends to work best in small trading communities such as commodity trade associations, where the parties will continue to do business and where an adverse award and its effect on reputations will matter. It is less likely to be effective where the parties are strangers to each other and need never see each other again or suffer the embarrassment of an adverse award.

The result of arbitration is called an award. If it is valid it can be enforced like a judgment, but only through a national court. The intervention of national courts is often needed in connection with starting, preventing, promoting, assisting and terminating arbitration, so the arbitration process is seldom entirely free of national courts. Apart from some small claims in some jurisdictions where courts can force the parties to go to arbitration, no-one can be compelled to go to arbitration: it is consensual.

Arbitration is often chosen by contracting parties wishing to avoid national court litigation in the event of a dispute arising because:

  • They want the dispute resolved in private,
  • They want the dispute to be resolved by someone who understands their trade or profession,
  • They believe that arbitration will be quicker,
  • They believe that arbitration will be cheaper,
  • They think that the procedures in arbitration are less rigid and formulaic than court processes,
  • They wish to avoid what they see as endless appeals in the litigation process,
  • One or other (e.g. a state or a quasi-state body) refuses to submit to the national court of the other or does not trust that national court’s independence, or
  • Internationally arbitration awards are generally easier to enforce than national judgments.

The perceived advantages of arbitration over litigation may be more apparent than real.  Arbitration is frequently slower, and frequently more expensive, than litigation. In arbitration you are more likely to get an expert deciding your case.  Arbitration can be very flexible indeed but only if the parties truly collaborate about the resolution of their dispute, which is rare once the disagreement has erupted.  Arbitration is less likely to be made public but the confidentiality of arbitration was never total and is latterly becoming further diluted for various reasons.  In arbitration there is at best very limited scope for appeal and for many clients that is an advantage– unless, of course, the award is adverse!  An award by an arbitrator is more likely to gain the respect of the unsuccessful party – which may assist enforcement or make it unnecessary. In international disputes the successful party is more likely to be able to enforce an award than a judgment.  For a client contracting with a state or quasi-state entity which refuses to submit to a national court, there may be no choice if the client wants the contract.

When should you consider arbitration?

Arbitration clauses (referring to future disputes) are often included in written contracts, along with the choice-of-law clause and any jurisdiction clause.  If a dispute arises and the parties later agree to refer that dispute to arbitration, this is known as a submission agreement. These are rare, because by the time a dispute has arisen the parties are unlikely to collaborate and one will usually feel that his prospects of success are better if he declines to submit to arbitration.

Negotiators who have spent days or months trying to secure a contract will be understandably hesitant to jeopardise successful negotiation of the substantive terms with blunt talk about unpalatable topics like breach of contract, remedies and how and where the defaulter should be brought to justice etc, and many arbitration clauses are tacked on – often at 3am – without much, if any, thought being given to the wisdom of selecting arbitration at all.

Should you insert an arbitration clause?

Consider all the factors above in all cases (and seek advice about them) but in international contracts the question of enforcement (by you or against you) is likely to be paramount.  If you think that you are the party more likely to need a judgment or award, try to ascertain where your counterparty’s assets can be found and whether that country’s courts will enforce either foreign judgments or international arbitration awards.

The last thing you want is to spend a long time and a fortune in costs on litigation or arbitration only to find that when you get your favourable judgment or award it is unenforceable in the country where the respondent’s assets are located. Take advice before deciding on arbitration.

At Carter Lemon Camerons we have substantial experience of both domestic and international arbitration to deploy in the interests of clients, as solicitors, advocates and post graduate teaching. Arbitration matters in which we have been involved include the enforcement in England of an international award resulting from a major construction contract in Africa (the awards involved five different currencies), the performance of an English domestic construction contract and the alleged breach of a major international consulting contract (all subject to confidentiality).