Arbitration is a form of dispute resolution. Instead of going to court, businesses that find themselves in disagreement can submit their dispute to an arbitrator, whose decision is binding. The location and procedure for arbitration are usually contractually agreed between the parties.
Here we will discuss:
What is arbitration?
Arbitration is a method of resolving disputes without going to court. The Arbitration Act, 1996 (the ‘AA’) regulates arbitrations that take place in (or ‘have their seat in’, to use the legal term) England and Wales. When introduced, the AA was seen as ushering in a dramatic change to the existing laws on arbitration. It gave parties to arbitration much greater control and restricted the powers of the courts to influence arbitration proceedings.
Unlike forms of alternative dispute resolution (ADR), such as commercial mediation, early neutral evaluation or expert determination, the outcome of arbitration is binding on the parties. Decisions are final, with a limited possibility of appeal. Arbitration decisions are also widely enforceable both nationally and internationally.
The arbitration procedure is particularly attractive to businesses involved in complex commercial disputes, because the process is overseen by an arbitrator who usually possesses a degree of expertise in the subject matter of the dispute that a judge may lack. This helps reduce the time and expense involved in instructing independent experts to clarify technical matters to a court presided over by a judge. Also, arbitration proceedings are normally held in private, so the possibility of sensitive information becoming public is minimised.
Parties must agree to arbitration, and the decision to arbitrate is often taken when the original contract is entered into. Great care should be taken, therefore, when drafting the arbitration clause of a commercial contract.
We deal with arbitration agreements in more detail below but key considerations include:
- Specifying where the arbitration will take place
- What arbitration procedure will be used
- How the arbitrator will be chosen
- Whether any limits should be placed on the arbitrator’s power to take decisions
For a bit more information on the basics of arbitration, watch this video on arbitration featuring our Dispute Resolution Partner Michael Key.
Types of arbitration
It is of particular importance to carefully craft an appropriate arbitration clause in your contract.
In practice, the arbitration clause is often left until other contract terms are negotiated, which results in terms that aren’t always as rigorously negotiated as they could be. However, because the arbitration process is extremely flexible (the parties can decide how it will operate), it’s always worth considering how an arbitration might run if you were to encounter one further down the line. Parties may choose either for a recognised institution to assist in arbitration (‘institutional arbitration’), or they may opt for what is known as ‘ad hoc arbitration’ which will follow rules the parties design themselves, backed up by any default rules that operate in the seat of the arbitration itself.
National and international institutions have broadly similar approaches to arbitration. However, in some areas big differences exist in relation to issues such as confidentiality and costs. So when drafting an arbitration clause that specifies an institution, it’s crucial to ensure the correct choice of arbitrator is made. An experienced dispute resolution solicitor will be able to recommend an appropriate arbitral institution for your business dispute.
Major institutions include:
- International Chamber of Commerce (ICC)
- London Court of International Arbitration (LCIA)
- International Centre for Dispute Resolution (ICDR)
- The Hong Kong International Arbitration Centre (HKIAC)
- The International Centre for Settlement of Investment Disputes (ICSID)
Ad hoc arbitration
Here the parties in dispute decide on the procedural rules themselves. An arbitral institution won’t be involved, nor will the parties receive any institutional support. In practice, rather than design an entire procedure from scratch, parties will often use an existing framework such as those developed by the United Nations Commission on International Trade Law (UNCITRAL) to run an ad hoc arbitration.
The chief advantage of ad hoc arbitration is its bespoke nature: parties can tailor the rules to suit the specific dispute in question. However, the lack of institutional support and restricted access to experts available through ad hoc arbitration mean it is often a less attractive option for businesses in need of arbitration.
It’s worth noting that even ad hoc arbitration must comply with relevant laws of the country in which arbitration takes place. For example, under the AA that applies in England and Wales, the rules of natural justice must be observed and parties must have a right to challenge the award.
There are also sector-specific types of arbitration, including rules developed for the construction and shipping industries as well as rules for arbitration in commodity disputes.
The arbitration process
The main steps in arbitration are as follows:
- When a dispute arises under a contract and there is provision for that dispute to be referred to arbitration – whether ad hoc or through a recognised institution – a party wishing to commence arbitration sends a ‘notice to arbitrate’ to the other side.
- If an institutional arbitration is being carried out, the body will specify what the notice should contain. Typically it will include a description of the claim and, if appropriate, nominate an arbitrator.
- The responding party will be required to reply within a specified time and nominate its preferred arbitrator.
- The arbitration panel or tribunal must then be constituted in accordance with the rules of the appropriate institution. Usually a single arbitrator or a panel of three will oversee the arbitration.
- With input from the arbitrator(s), parties will narrow down the issues to be resolved and prepare a timetable for the process.
- The arbitration then proceeds in accordance with the rules of the institution or the ad hoc rules developed by the parties. Usually there will be provision for producing written submissions, witness statements and exchange or disclosure of documents between the parties.
- A hearing or hearings will take place where lawyers will appear before the tribunal to present arguments and challenge the other side’s position.
- The tribunal announces its decision or ‘award’.
The decision may, in some circumstances, be challenged. These circumstances depend largely on the terms of the contract, the rules of the relevant arbitral institution and the rules of the seat in which the arbitration was held. Under English law for example, there are strict time limits if one side wishes to challenge an award. Grounds for challenging are also limited. They include:
- The award doesn’t address all the issues
- There is ambiguity or a mistake in the award
- There has been a serious irregularity in the conduct of the arbitration
- The tribunal didn’t have correct jurisdiction
- The award contains a mistake of law
Should you arbitrate or litigate?
As a means of resolving commercial disputes, arbitration is an increasingly attractive option. But the process isn’t suitable for every business or every type of dispute. The table below highlights some of the advantages and disadvantages of arbitration when compared to litigation through the courts.
|Arbitration advantages||Litigation advantages|
|Compared to litigation, arbitration is a flexible process. Parties can choose to follow the rules of a recognised institution or design their own procedural framework that is tailored to the dispute in hand. Arbitration gives parties a degree of control that litigation doesn’t offer.||The cost of an arbitrator is borne by the parties. A judge presiding over a commercial dispute is not paid by the parties.|
|Arbitration awards are recognised internationally. The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards introduced a regime for enforcement of awards internationally that requires signatory countries to give effect to international arbitration awards in a way that surpasses any current agreements for the international recognition of court judgments.||When several parties are involved in a dispute, litigation is often more appropriate. Although arbitration can be multi-partied, the procedural mechanisms to join parties into arbitration can be complex and depend on the consent of third parties.|
|Because parties can choose the seat of arbitration, the process is perceived as being neutral. When the parties in dispute are from different legal jurisdictions, one party won’t be forced to submit to the courts in the country of his or her opponent. This sense of neutrality is strengthened by the fact that the parties themselves decide on the composition of the arbitration panel in a consensual manner.||In general, courts have greater sanctions at their disposal to force uncooperative parties to comply with court orders and directions. A party that wishes to delay matters can more effectively achieve this during arbitration than during litigation.|
|Expertise – the parties have a wide discretion when choosing the arbitrator(s). They can establish the credentials of a potential arbitrator before appointment to ensure that he or she has sufficient expertise in relation to the specific dispute. This can avoid delays and the cost associated with the extensive technical briefing of a less experienced arbitrator or judge.|
|Private hearings – the privacy of arbitration proceedings is particularly attractive to businesses that may fear the disclosure of commercially sensitive information in a court case heard in public. Additionally, under English law disclosure to third parties of most documents in arbitration proceedings is prohibited.|
|With limited opportunity to appeal an arbitral award, arbitration is sometimes viewed as offering a more clear-cut and final outcome when compared to litigation.|
The rules governing arbitration will depend on what the arbitration agreement says. Often, the agreement will state that the rules of a particular arbitration institution will apply to the process. These will usually cover issues such as when the arbitration procedure can begin, how the tribunal is to be set up and what procedures are to be followed. If the arbitration is ad hoc, the parties must agree between them the rules that will apply – subject, of course, to any mandatory rules that apply in the jurisdiction concerned.
As we mentioned above, the rules vary between institutions, so you should always seek advice before committing to the authority of a particular institution.
Drafting the arbitration clause
Once you decide that arbitration is a sensible way to deal with any conflicts that arise during the life of your commercial contract, it’s worth giving some thought to the type of arbitration clause you want to include. Unsuitable or inadequate provisions will only cause uncertainty (and possible legal challenges) if the clause is ever invoked. One of the first decisions to make is whether you want to use ad hoc arbitration or make use of the template clauses of an arbitral institution. We discuss the differences in these two types of arbitration in Types of arbitration, above.
As with any legal agreement, it’s crucial to ensure that the terms of your arbitration clause are clear. Above all, you should ensure you make clear that there is a requirement to arbitrate ahead of litigation or any other form of ADR.
If you want to exclude some forms of dispute from arbitration, you should also clearly define what type of disputes will be subject to arbitration and which will not. Aside from these initial considerations, a typical arbitration agreement should establish the following:
- Which country’s law governs the agreement
- Where arbitration under the contract will take place (the seat)
- How many arbitrators will be appointed and what their expertise should be
- Whether proceedings are confidential
- Which institution’s procedures apply (if it is an institutional arbitration)
- What specific rights will exist to appeal or challenge the arbitrator’s award
Arbitration v adjudication
We are often asked to advise on the suitability of a particular form of ADR. Adjudication is a form of alternative dispute resolution used in commercial disputes, and arbitration is often mistakenly thought of as another method of ADR, because it’s an alternative to court. However, the process for arbitration often has more in common with litigation than ADR, and arbitration decisions are more final than many types of ADR. Arbitration and adjudication, then, do have many similarities but also significant differences. We outline these below:
- Applicability – In the context of commercial disputes, adjudication has limited scope. It is used mostly in construction contract disputes where there is a statutory right for parties to refer a dispute arising in a construction contract to adjudication. Arbitration is of much more general application, used in all manner of commercial disputes.
- Use – Unlike arbitration, adjudication is often used to resolve a dispute that arises during a building project without jeopardising completion of the project as a whole. Adjudication can also help protect an existing commercial relationship.
- Time – Adjudication is very quick: a 28 day turnaround in most cases. Enforcement by the Technology and Construction Court (the TCC) is also extremely efficient. Arbitration, while generally faster than litigation, is a more involved process and can become bogged down in procedure if complex issues arise or if one party is uncooperative. While the speed with which adjudication matters can be disposed of is perceived as one of its chief advantages, the pressure on adjudicators to reach a decision can, occasionally, lead to wrong or ill-thought-out decisions.
- Costs – Because of the truncated timetable, the risk of costs spiralling is lessened in adjudication. In arbitration, this is only a possibility. Adjudication gives financially weaker parties a fair chance to raise disputes without exposure to the costs of litigation or arbitration.
- Choice – Parties to arbitration and adjudication are both free to choose the person or persons to decide their case.
- Flexibility – Arbitration is more flexible than adjudication as parties can use ad hoc agreements to dictate procedure. But this can lead to delay and expense as the details of the procedure are hammered out.
- Decisions – An arbitrator gives a final and binding decision or award with restricted rights of appeal. Adjudication decisions are binding until the dispute is litigated or arbitrated fully. Courts will rarely allow a challenge to an adjudicator’s decision.
Arbitration v mediation
Arbitration and mediation are two very distinct forms of dispute resolution. One notable characteristic of most mediations, for example, is that the mediator doesn’t actually decide the case on its merits. Instead, the aim is to find an agreement between the two sides. This is not the case in arbitration. We list some of the other principal differences below as well as some similarities:
- Privacy – Both processes take place in private and are largely confidential.
- Outcomes – Mediation doesn’t result in a binding decision. It’s up to the parties to find a solution and then, if appropriate, reflect that in a binding agreement. Arbitration does result in a final, binding decision.
- Timing – Arbitration is a more formal process, likely to take more time than mediation, which can be started at short notice if there is a suitable mediator available and the parties are motivated to resolve their differences.
- Cost – Mediation will usually be much cheaper than arbitration.
- Flexibility – While arbitration can be tailored to meet the needs of the parties, it’s still a more formal process than mediation, in which parties are in complete control of the process.
Finally, it’s worth mentioning a process that combines both mediation and arbitration, known as ‘med-arb’, can be used if mediation stalls and the parties agree to alter the mediator’s status to that of an arbitrator.
Costs and fees
As we have mentioned, arbitration is generally cheaper than litigation, but it can still result in significant cost to the parties involved. At its core, arbitration is carried out by consensus. So, while there are statutory rules about how costs may be borne following arbitration, these aren’t binding.
This is reflected in the Arbitration Act 1996 that governs arbitrations with their seat in England and Wales. It states:
- The tribunal may make an award allocating the costs of the arbitration as between the parties, subject to any agreement of the parties.
- Unless the parties otherwise agree, the tribunal shall award costs on the general principle that costs should follow the event (meaning that the successful party is entitled to an order to recover costs from the unsuccessful side) except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.
In terms of costs, it’s also important to note that:
- Arbitrators have a wide discretion when it comes to the issue of costs
- Parties can decide among themselves how to divide costs
- If arbitration is being carried out with the support of an institution, that body may have its own rules about costs. These must be taken into account.
Find more information on the costs involved in our guide to Funding Litigation and Arbitration.