Or, a comparison of the advantages and disadvantages of arbitration and litigation.
Arbitration: A private system of adjudication. Parties who arbitrate have decided to resolve their disputes outside any judicial system. In most cases, arbitration involves a final and binding decision, producing an award that is enforceable in a national court.1
The true origins of arbitration are probably lost in time. Who knows when it was that humans first decided to submit themselves to another human’s decision to reach a settlement instead of using whatever other public, legal assistance was available to him at the time or indeed resorting to the club, sword or axe. We do see however, throughout history, the use of dispute resolution, in a form of arbitration, is evidenced. The Greeks had a form of arbitration2 , who in turn influenced the Romans.3 In the history of religion we also see encouragement towards forms of arbitration and as a means for people to make peace with one another in Judaism, Christianity and Islam4:
In European history, the charters of the merchant guilds and the development of ‘Lex Mercatoria’ or trading principles that were used by merchants throughout European countries who evolved a system of customs and practice, that was enforced through merchant courts along key trade routes. Decisions in the courts were made ‘ex aequo et bono’5, that is ‘according to the right and good’ or ‘from equity and conscience’. For arbitration that meant that the arbitrator could dispense with the local law and simply consider what was deemed to be fair and equitable in the case at hand. It is from this ‘Lex Mercatoria’ that probably much of what we deem today as international commercial law, stems, including arbitration institutions, the procedures, the arbitrators, customs and good practice among parties and so on.
Whilst many forms of dispute resolution exist such as mediation, conciliation, neutral evaluation, etc. for the purpose of this essay, we will focus on arbitration and litigation and contrast the advantages and disadvantages of both.
First, the defining characteristics of both.
Arbitration: In arbitration, parties must consent to the arbitration. This is normally done through a clause in a commercial contract, but doesn’t have to be. The arbitrator or arbitrators are all private citizens and as such, not really beholden to any governmental influence or policy. At the end of an arbitration, a final and binding award is made which, although in some jurisdictions can be challenged6 can usually only be appealed if one of the parties feel that there was something wrong in the arbitration process7.
Litigation: Litigation encompasses a number of activities, including negotiation, mediation and arbitration. For our purposes, we will consider litigation to be the process of the courts. It is the ultimate, legal method for resolving disputes between companies, people or people and the state. The dispute is brought before a judge, a publicly appointed officer, who is appointed according to the respective country’s processes. The judge has the authority to hear and determine an outcome for legal matters that are brought before him or her in a court of law.
Arbitration has several advantages, of which, some of the main ones are listed below:
Party autonomy - with arbitration, parties can choose the place of arbitration, so they can stay out of the other party’s courts. Instead, the parties can agree on a neutral venue. They can also choose and agree on an arbitrator. For parties in litigation they have no say over the court venue or the appointment of which judge will hear the case.
Enforcement - the likelihood of international enforcement under arbitration is higher than litigation. Many countries now are signatories to the New York Convention of 1958, making enforcement of an award easier to enforce internationally than a national court judgement in another country’s jurisdiction. Under the convention, courts are obliged to enforce an award with few exceptions.
Confidentiality - the arbitration process and the final award are kept confidential unless expressly allowed by the parties to the arbitration or in the event of an appeal. Keeping the details out of the public media might be advantageous to the parties in dispute so this makes arbitration very attractive in commercial disputes. In litigation, courts will approach their role with the principle of open justice. Court decisions, with some exceptions such as those involving children, are reached in public and will override a company’s preference for confidentiality.
Advantages of Litigation over Arbitration
Whilst arbitration has its advantages, obviously there are some areas where litigation offers more advantages..
Limited powers - an arbitrator has limited powers to coerce a party to do something. They cannot penalise a party if they fail to comply with the arbitrator. In litigation, failing, refusing or neglecting to comply with the court may be a criminal or civil offence, and possibly punishable by prison or a fine depending on the type of order that was disobeyed.
Right of appeal - whilst the right of appeal is limited (see above) and this may be beneficial in bringing the dispute to an end, it does leave the losing party at a disadvantage. In the courts, a party can appeal any judicial decision through higher courts, allowing the losing party the opportunity to have the case and decision reviewed by another independent judge.
Multi-party disputes - in complex cases it is likely that there are multiple parties. An arbitration tribunal may not have the power to join all relevant parties even if they are involved in the dispute in some manner because arbitration relies on consent. In litigation, it is up to the judge how a case will proceed and so can order a company to be added as a new party to the case.
As we have shown arbitration and litigation (the court process) have their advantages and disadvantages, so the choice of which one to take really depends on the desires of the parties involved. Do they prefer the party autonomy of arbitration or do they recognise the limited power of the arbitration tribunal and prefer a judge to hear the case? It is these very advantages or disadvantages that make either one appealing.
1 Moses, Margaret L, The Principles and Practice of International Commercial Arbitration, (2016) 2nd Ed, pp 1
2 Wolff, Hans Julius, The Origin of Judicial Litigation Among The Greeks, Traditio, Vol 4 (1946) pp 31-87
3 Matthaei, Lousie E, Place of Arbitration and Mediation in Ancient Systems of International Ethics, The Classical Quarterly, Vol. 2, No. 4 (Oct., 1908), pp. 241-264
4 Exodus 18:16 (King James Bible) - “When they have a matter, they come unto me (Moses); and I judge between one and another, and I do make them know the statutes of God, and his laws.” Matthew 5:25-26 New International Version (NIV) - 25 “Settle matters quickly with your adversary who is taking you to court. Do it while you are still together on the way, or your adversary may hand you over to the judge, and the judge may hand you over to the officer, and you may be thrown into prison. 26 Truly I tell you, you will not get out until you have paid the last penny.” The Qur’an - Chapter ‘Al-Hujurat’ (The Rooms) verse 9 - “And if two parties of believers fall to fighting, then make peace between them. And if one party does wrong to the other, fight ye that which does wrong till it return unto the ordinance of God; then, if it returns, make peace between them justly, and act equitably. Lo! God loves the equitable.”
5 Kotzur, M. (2019). Ex Aequo et Bono. [online] Opil.ouplaw.com. Available at: https://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e1402 [Accessed 14 Oct. 2019].
6 English Arbitration Act 1996 art. 69(1)
7 Moses, Margaret L, The Principles and Practice of International Commercial Arbitration, (2016) 2nd Ed, pp 2