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When arbitration is used and why

by Matthew Rushton on 16 Sep 2016

when arbitration is used and why

In almost all instances, arbitration must be contemplated at the contract drafting stage. Parties may, of course, agree to take a dispute to arbitration at any stage, but once a dispute has broken out, positions become polarised, and agreement is accordingly less likely. The reasons for preferring arbitration clauses to the more usual reference to the courts – in a commercial context – boil down to the so-called "three Es": expedition, expertise and enforcement.

1. Expedition

To elaborate, one of arbitration’s key strengths is that parties don’t join a waiting list for a trial date and the
attention of a judge in interlocutory proceedings. They are free to choose their arbitrator and should do so
mindful of availability and disposition to run an efficient procedure. Not only should arbitration run to a tighter
timetable than is possible in many courts, but also the final and binding nature of the award eliminates the
possibility of a decision being deferred until all appeal routes have been exhausted.

It is worth noting here that the option to incorporate an appeals procedure into the arbitration process exists, which some parties – as an arguable safeguard – choose to use. The convention remains, however, that arbitration is a one-shot process. The risk of the “wrong” result is generally considered an acceptable
trade-off for speed and certainty.

The approach to document disclosure in arbitration is inherently narrower in scope than is commonplace in
court: individual rather than classes of documents are identified, and the procedure is not driven by rigid rules.
There are further savings of time in hearings – which tend, consistent with the consensual underpinnings of
arbitration, to be less theatrically hostile and bullying than court proceedings – because advocacy is often
limited by the so-called Chess Clock Procedure, which allocates time for presentations that cannot be exceeded.

2. Expertise

Expertise is the second of the three "Es". The courts of England and Wales are very much the exception
in having specialist sub-divisions, including a patents court, the companies court, technology and construction court, the commercial court (recently augmented with the Financial List), and the admiralty court. The presiding judge will likely have spent a career (usually as a barrister) trying precisely the kind of case over which they now sit as a judge.

Even so, if the facts of a particular case turn on the mechanics of a hydro-electric dam, for example, it is
arguable that others would be better placed to come to a view on the facts. Such a possibility is central to
arbitration’s commercial appeal. It is not uncommon for arbitration clauses to call for a retired professional from
a particular industry or sector. The result can be time saved on teach-ins for the tribunal and, accordingly,
greater confidence in the final award.

3. Enforcement

Enforcement is the final of the three “Es” and, in an international context, perhaps the most important.
While mutual recognition of court judgements exists in the EU and, in a more limited context, as a matter of
common law, between the United States and the UK, such recognition is patchy and inconsistent compared
with the near-universal recognition of arbitral awards under the New York Convention (1958). The convention
provides for the recognition of foreign arbitral awards – at the time of writing – in 153 states. It permits parties
to enforce part of their award in one jurisdiction, and part in another, if necessary. The result being that wherever a defaulting party trades their assets can be seized.

In addition to the above, arbitration clauses should always be considered where confidentiality is commercially significant. Joint venture disputes are a case in point where exposure of commercially sensitive material, including details of existing and future business arrangements, could impact positions in the marketplace. Likewise, a court case concerning licensing of intellectual property can be a gift for competitors, and even a victory can be counter-productive.

All of the above should be considered at the contract drafting stage. Further guidance is available here in the JAMS International Clause Workbook: http://www.jamsinternational.com/rules-procedures/international-dispute-resolution-clauses

To read more about how arbitration can help businesses settle commercial disputes in place of litigation, read our eBook on the subject, Litigation in Review.

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Topics: ADR, Mediation, Litigation

Matthew Rushton

Written by Matthew Rushton