Arbitration or litigation?
International Arbitration expert and partner at Ontier, Aoife Keane explains the differences between arbitration and litigation, as well as the advantages offered by the former
What is international arbitration and how does it differ from litigation?
International arbitration is a private means of parties resolving their disputes. It’s where parties choose to resolve their disputes in a different forum from the courts of a national country and rather to resolve it under rules that they choose themselves with an arbitrator or arbitrators that they have chosen themselves. And they really decide between themselves what rules will apply and what procedures will apply. For parties from different jurisdictions, as you will have in supply chains globally, it’s very important for them that they can find a private means of resolving disputes that don’t rely on the nation states of one of the parties, courts. They want to have a neutral forum to resolve any disputes that arise in the context of their agreements.
And what are the principal advantages then to international arbitration over litigation?
Well, certainly in the context of international trade, there are many advantages. The first I would say is the advantage of territorial neutrality. So if you have a contractor, one contracting party who’s based in the UK and one who’s based in Romania, if they have a dispute down the line in relation to some part of the supply chain or some part of the logistics side of things, neither party is going to want to resolve that in the courts of the other party. They want some neutral forum and more importantly, they also want the chance to be able to choose who is going to resolve the dispute. Do I want an English judge who may not know the intricacies of, let’s say, supplying iron or do I want an expert in that area? The arbitrators can be chosen by the parties so that they can choose professionals that have that expertise.
They can also choose the rules that decide where they’re going to have the hearings, when hearings are needed, how many arbitrators, what the timelines are for putting in their submissions, expert evidence, et cetera. So, it really allows international parties to have a neutral forum that they have chosen themselves and that is seen as one of the major advantages. Another advantage is confidentiality. Parties love confidentiality when they have a dispute because they don’t necessarily want to have bad publicity globally in the export market industry in relation to what has gone wrong. With arbitration you’ve got that confidentiality between the parties and there’s also the ability to decide between themselves how matters progress. And none of this ever has to come out in mainstream media.
Can an arbitration agreement be included in any commercial contract?
Absolutely. In any commercial contract, which is an agreement essentially between two contracting parties or more, they decide what terms are agreed between them and they can decide that they would like to arbitrate rather than litigate in the courts of any jurisdiction that the main point is that the parties must agree. Arbitration is a consensual process between parties. And if the parties say, “let’s take our dispute outside the realms of the national courts, let’s take it to a private forum where we can arbitrate rather than litigate”, all they need to do is vary their agreement if that clause doesn’t exist there already to say that they have agreed that arbitration will be the means by which they will resolve their dispute and that that can be incorporated into their agreement. So, any agreement can have an arbitration clause.
What is the difference between institutional arbitration and ad hoc arbitration?
Institutional arbitration is arbitration under the rules of a specific institution, and there are many institutions that run arbitrations. Some of the best known are, for example, the LCIA, which is the London Court of International Arbitration; the ICC, which is International Chamber of Commerce; Singapore International Arbitration Centre; Hong Kong International Arbitration Centre. There are many, and all of these institutions have their own rules and procedures that the parties will follow if those rules have been incorporated into their agreement. Typically, in the clause that you would find the agreement to arbitrate, it will say which rules apply if institutional rules are intended to apply, and that will govern the whole procedure. It will also state how many arbitrators and what the seat is. But under institutional rules, the good thing for the parties is they don’t have to agree on every single thing because there are rules in place. Ad hoc arbitration, on the other hand, simply provides that the parties will arbitrate but not under any particular institutional rules. And in that case, the parties need to agree on everything from how the arbitration tribunal, as in the arbitrators, are nominated and appointed, down to how the pleadings are submitted, timelines for all the steps that are required, et cetera. So ad hoc is probably a lot more challenging for parties and parties generally will choose to use some institutional rules.
What is the role of the arbitral tribunal and how are the arbitrators appointed?
Once the parties have agreed to arbitrate, if any disputes arise, they will say in their agreement to arbitrate, which is the clause in their agreement, how they would like to appoint the arbitrators. Usually you will have either one, a sole arbitrator, which might be better for a lower value dispute, or a three-person panel essentially. And in the case of a three-person panel, what is usually provided for is that each party chooses one of the arbitrators and then those two arbitrators choose the third who will be the chairperson of the tribunal. Now this allows parties, especially in the context of international cross-border agreements and in the international trade arena, to choose one arbitrator each, and they can choose a party that they know has expertise in exactly the area that is in dispute. And that is very important for parties.
Is it possible to add an arbitration agreement to an existing contract?
Yes, absolutely. I mean it will depend on having the agreement of the counterparty to the contract though. What you would do in this instance is contact whoever is the party on the other side that has control of the contractual relationship and indicate that you’d like to vary the contract to include an arbitration clause instead of a clause that would send any disputes to the national courts. I mean, the parties have to agree on this because arbitration from its very core is a consensual process. But assuming you can get the agreement of the other side and vary the contract in accordance with whatever the variation provisions are, so it’s in writing signed by the parties, et cetera, then yes, it’s perfectly possible to change from a litigation in the national courts to arbitration.
Finally, when it comes to a multi-tiered dispute, can arbitration also form part of that resolution agreement?
Yes. You regularly see that in the case of supply chain agreements, for example, because parties don’t want to press the red button and end up in a major dispute with the other side with whom they have to do business perhaps for many years into the future, and they may have different business streams going on with the same counterparty. So generally, in these multi-tiered dispute resolution clauses, what you might see is that the first level of the dispute will be a discussion, perhaps between the CEOs or the general counsel or the manager involved in supply chain logistics, whatever it might be. Those managers may speak and have 28 days to try to resolve their issues or maybe a longer period. It may then go to a mediation. And mediation, again, is not a court process, it’s not an arbitration process. It’s not binding unless the parties make it binding. At mediation, the parties can sit down and ventilate their issues with a mediator who tries to get them to reach an agreement. And if that doesn’t work, they can move to the next level, which can be arbitration or litigation. So, arbitration, you will often see multi-tiered dispute provision clauses in that regard.
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