Sometimes it is hard to know what type of dispute resolution process is right for you, particularly when the process is being agreed in a contract, prior to any dispute arising.
Is litigation the best method for resolving potential or actual disputes? Or is there another way of reaching a binding and enforceable outcome without having to go through the rigmarole of litigation?
This article provides an overview of arbitration as an alternative to litigation to help you identify when it might be appropriate to refer a dispute to arbitration.
What is an arbitration?
An arbitration is the resolution of a dispute outside of court between two or more parties, by an independent decision-maker or panel of decision-makers who make a determination (or “award”) which is binding and enforceable.
The parties can (usually when entering into a contract) agree to resolve disputes by arbitration and can select a set of rules published by arbitral institutions such as the ACICA, ICC, SIAC or LCIA to govern the process or adopt the default position under national law (which, in Australia, is the UNCITRAL Model Law).
Unlike other alternative dispute resolution processes such as negotiation or mediation, arbitration results in a final binding outcome as opposed to a mutually agreed resolution of a dispute. The appointed arbitrator(s) will make the final award in much the same way as a judge makes orders after a court hearing, considering the evidence and submissions presented by the parties. Due to the binding and enforceable nature of arbitrations, it a dispute resolution process that is typically viewed as an alternative to litigation, rather than a stepping-stone along the way.
When will an arbitration occur?
Most commercial contracts contain a dispute resolution clause. Some contracts will specifically provide that any dispute which arises is to be resolved by way of an arbitration.
Alternatively, if there is no such clause and there is a mutual appetite to achieve a resolution of the dispute without litigation, the parties can agree to resolve their dispute by referring the dispute to arbitration.
Advantages of an arbitration
The key benefits of an arbitration as opposed to litigation are:
Parties can select their own arbitrator(s)
Unlike court proceedings, where parties are assigned a judge, parties can, as part of negotiating the terms of their agreement, elect the process by which the sole arbitrator or three-member panel is appointed (either by agreement or as stated in the applicable arbitration rules). This ability to nominate and appoint the decision-maker(s) can be especially helpful where the subject matter of the dispute is particularly industry-centric or complex, as the parties can select people with the necessary industry knowledge to be able to resolve the dispute efficiently.
Parties can craft the scope of the award
The parties define the scope of the dispute and arbitral award and can agree to limit the issues to be considered by the arbitrator(s) depending on the ongoing nature of their commercial relationship. For example, the parties might agree to seek a ruling from an arbitrator on the proper construction of a particular contractual clause but leave the consequences of that construction to them to resolve by negotiation or some other means.
Parties can decide on the procedural requirements and make the arbitration as rigid or as flexible as they like
For example, the parties can agree to adopt a “memorial style” process whereby all evidence is presented alongside legal submissions (as opposed to the pleadings approach typically seen in litigation: statement of claim and defence, etc.). The parties can also agree to forgo costly document disclosure processes and instead opting to have targeted document production requests (known as Redfern Schedules). The parties can also agree to have the dispute determined “on the papers”, doing away with the need for a formal and possibly lengthy oral hearing. This flexibility can lead to time and costs savings.
Finality and enforceability
Arbitral awards are final and binding with very limited grounds for challenge (discussed further below) meaning that the parties do not have to wait for a protracted appeal process to resolve their dispute. Arbitral awards can be enforced against an award debtor overseas through the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (ratified by 172 states) which can be a simpler process to enforcing foreign court judgments depending on the jurisdiction. Arbitral awards made in or outside Australia can also be enforced by Australian courts.
The parties can choose for the matter to be kept confidential and private, thereby avoiding the public nature of court proceedings. This is particularly commercially relevant if the dispute is one which might otherwise garner significant media attention, involves trade secrets or if a party is engaging with a numerous counterparties on similar contractual issues. It may also be desirable if the parties remain in an ongoing commercial relationship.
Disadvantages of an arbitration
Some disadvantages of resolving a dispute by way of arbitration include that:
Parties have to pay the costs of the decision-maker(s) as well as the costs of hiring a venue to hold the arbitration. These expenses can be managed by using free hearing venues (e.g., the offices of the legal representatives/law firms) and by capitalising on the savings which can be derived by streamlining processes such as document production and remote/video-link attendances by witnesses and experts.
Efficiency can be degraded by a poorly drafted arbitration agreement
If important details such as the applicable rules, seat or arbitrator appointment process are not set out, or not set out sufficiently clear enough to avoid debate, preliminary issues can cause delay with respect to commencing and concluding the arbitration.
Parties are giving up their rights to appeal the decision
The finality of arbitration cuts both ways. There are only very limited circumstances in which a party can appeal an arbitral award. By and large, by agreeing to an arbitral process, the parties are agreeing to give up their right to appeal a decision in favour of concluding the dispute in a shorter timeframe to that available in litigation where there can be multiple levels of appeal which can delay final resolution of a matter.