Is it true that arbitration is (1) cheaper than litigation, (2) quicker than litigation, (3) totally confidential, and therefore (4) preferable to litigation?  Frequently the answer is No.

Preliminary: Collaboration 

Arbitration depends on collaboration between contracting parties. That collaboration may be limited to agreeing in the substantive contract to include an arbitration clause (and possibly some mechanical arrangements for a future arbitration) but no more than that; it may however extend, after a dispute has arisen, to active collaboration at the time of the dispute resolution, about the best/quickest/cheapest method of sorting out their differences.

Arbitration works best in close communities where the disputing parties are likely to engage with each other in the future and whose reputations in the close community will suffer if they behave unreasonably in connection with a dispute e.g. for example various nations’ Coffee Traders Associations, and the shipping community in London in past centuries (an industry which has given rise to much English contract and arbitration law).  They have an incentive to continue collaborating.

If the parties are truly collaborating about resolving their dispute, arbitration is likely to be quicker and cheaper than litigation, and therefore preferable.

As between parties who have only ever contracted once and are unlikely ever to have business dealings again, the motivation to collaborate in arbitration once a dispute has arisen is reduced almost to vanishing-point because it is invariably the aim of the Respondent/Defendant to frustrate the process as far and as long as possible in order to avoid or defer having to pay. 

It is in this non-collaboration scenario that the following three questions and a warning become very prominent, but by the time the parties have fallen out it is too late then to think about them:  they need to be thought about before any decision is taken to resort to arbitration at all.

Question 1: Is arbitration cheaper than litigation?

Usually not, in my experience. Whereas most jurisdictions provide for litigation court premises, judicial time and administration all free of charge subject to the payment of court fees, this is not true of arbitration; in arbitrations the parties have to pay for premises, the fees of any institution administering the arbitration and the time and travel expenses of the arbitrator (or arbitrators if more than one which is frequently the case). Lawyers’ hourly rates are likely to be the same as for litigation, but the scope for additional work peculiar to arbitration is great. Whereas preliminary or introductory disputes are unlikely in court litigation, there is very substantial scope in arbitration disputes between non-collaborating parties for preliminary argument about the validity of the substantive contract and, separately, about the arbitration clause within it (in an extreme case, even about whether the arbitration clause can survive on its own if the substantive contract is void), the scope of the tribunal’s jurisdiction, the identity of the arbitrators and their neutrality, impartiality and possible conflict, and even the “seat” or location of the arbitration.

There are procedural matters which, even today, arbitral tribunals may not be able to deal with, like freezing injunctions, compelling the attendance of witnesses and the validity/registration of status documents such as marriage or divorce, patents, trademarks etc.  The assistance of a national court often has to be invoked in order to get the arbitration going, keep it running along proper lines, and enforce any award arising from the arbitration.  These matters all generate additional expenditure over and above the cost of the arbitration itself, not to mention appeals or applications to set aside awards on the grounds of irregularity.

To recap: where the Respondent is still collaborating, arbitration may be cheaper than litigation but where the Respondent is being obstructive, it almost certainly will not be. 

Question 2: is arbitration quicker than litigation?

The answer depends on two things: (1) the extent to which the Respondent collaborates in the quick determination of the dispute; and (2) the speed of litigation in the relevant litigation jurisdiction. Litigation in England at the moment is quite quick: two to three years between commencement and even a substantial trial. I believe that, for example, in Italy, India and South Africa at present, that period would be many years.

All the preliminary disputes referred to above can cause tremendous delay even before the arbitration begins. Furthermore, in terms of controlling the timetable and delays within the arbitration, arbitrators are generally thought to be less robust than judges in England, particularly where a Defendant/Respondent is playing for time.

At the contracting stage it would be safer to assume that the Respondent will be obstructive.

So: without the Respondent’s collaboration, arbitration would probably be slower than litigation in England; in other jurisdictions that comparison must be based on the probable length of time from commencement to trial in the jurisdiction concerned.

Question 3: is arbitration confidential?

In principle, arbitration is totally confidential, and the content (and possibly even the fact) of the arbitration are known only to the parties, the arbitrator(s) and their immediate staff, and to any institution involved in the administration of the arbitration. So far so good. In practice, the principle of total confidentiality is eroded in various ways, such as: 

1. for the benefit of educating arbitrators and to establish a body of precedents, the International Chamber of Commerce has in recent years taken to publishing anonymised awards; the theory is that the reasoning behind the decision is available to future arbitrators but the identity of the parties is not. Depending on the subject-matter of the arbitration, ascertaining the identity of the parties may not be that difficult in fact;

2. If the assistance of the court is required in order to get  the arbitration going, keep it running along proper lines, and enforce any award arising from the arbitration, court proceedings in many jurisdictions are public and judgments and evidence given in court are available. The parties and subject-matter of the dispute may therefore become widely known; and

3. the same applies if there is any appeal (possible in England but on very limited grounds) or an application to set aside the award because of some procedural error or irregularity. 

Any assumption that the subject-matter of the dispute will never go beyond the parties and the arbitrator(s) is unduly optimistic. 

Question 4: Is arbitration preferable to litigation?

The choice of arbitration over litigation can be made on the principal grounds of cost, speed, confidentiality and possibly other grounds like location and convenience etc, but frequently the decision to use arbitration rather than a national court system is made because one or more of the parties is a state or a para-statal entity which declines to submit to the court jurisdiction of another state. Another frequent motivation is distrust by at least one party of the national court system of the other party. 

The reluctance to submit to a national court system usually overrides all other factors. If that factor does not prevail, cost, speed and confidentiality are the chief factors which should be taken into account in deciding between arbitration and litigation.

However, the enforceability of the award in the Respondent’s home jurisdiction must also be considered.  Most states are signatories to the New York Convention of 1958, and therefore obliged to respect arbitration agreements and enforce arbitration awards provided they comply with some very basic requirements for natural justice. However, do not assume your client can always enforce an award:  certain states do not recognise arbitration awards at all, e.g. Angola (not a NYC signatory), and in South Africa the enforcement of arbitration awards against the mineral assets of the Respondent requires the consent of the relevant minister.

One incidental advantage of arbitration over litigation in England is that litigation is bedevilled by the need to budget in advance and for the approval by the court the likely costs of each stage of the litigation, and that budget then constitutes a maximum for the recovery of costs. Budgeting is time-consuming and expensive and works to reduce costs recovery overall; not surprisingly, it is universally unpopular amongst those trying to resolve commercial disputes. Happily, budgeting does not apply in arbitration. 

Further, if there is a dispute on facts about which the oral evidence of live witnesses is required, arbitrators invariably do not require witnesses to give evidence under oath, and arbitrators are thought by many (me included) to be too soft and gentlemanly about allowing robust cross-examination. 

Do consider all these things before the substantive contract is concluded.

A Warning: the 3am phenomenon

In practice, however, in my experience, too little thought is given at the contracting stage to these important questions. Frequently the substantive negotiations over the commercial terms of the contract have taken months and are resolved to everyone’s relief very late at night – even at 3am - with the negotiators desperate (a) to go home (b) to claim all the credit for a successful negotiation and make some proud announcement (c) to crack open the champagne etc, and the last thing the successful but tired negotiators want is to be told by some irritating lawyer that things could go wrong (they do - that’s why we disputes lawyers have a job!) and they must now devote further time to deciding how some dispute way in the future must be decided. The selection of arbitration tends to be a knee-jerk decision without proper consideration, sadly.

In an ideal world, your client and you should ask the following questions before deciding to insist on arbitration: 

1. Which party is the more likely to default?

2. In which jurisdiction is that party based?

3. In which jurisdiction are that party’s assets?

4. Are either or both of those jurisdictions a signatory to the New York Convention? 

5. If not, is it possible to enforce an arbitral award in that jurisdiction?

6. How quick or slow is litigation in that jurisdiction?

7. Do the courts in that jurisdiction suffer from anti-foreigner bias?

8. Does the proposed arbitration system allow appeals – and do you want that?

9. In the “seat” of the arbitration, do the courts intervene to promote arbitration?

Without serious consideration of these factors any arbitration v litigation decision is unlikely to have been taken properly.

In an ideal world, while the commercial negotiators were spending weeks or months sorting out the substantive terms, their respective lawyers would be simultaneously negotiating the dispute resolution clause. Clients however seldom bring in lawyers as early as they should, with the ironic but inevitable result that they accidentally generate more legal work to be dealt with later. And expense…, so penny wise and pound foolish.