Mysterious Secret Society
From time to time arbitration is the subject of public discussion. Especially the fact that arbitration is not public, and that disputes are resolved by arbitrators who operate outside of the court system, has a tendency to raise questions. Lately the free trade agreement (TTIP) being negotiated between the EU and the US, and its possible arbitration clause, has caused public debate. Certain quarters have regarded it problematic that sovereign states are bound by arbitral awards and have described arbitration as some sort of a mysterious secret society. Yet, between companies arbitration is and remains the most sensible dispute resolution mechanism.
The aspects that draw public attention are indeed some of the advantages of arbitration. From the perspective of a company, it is our experience that corporate clients usually prefer to have disputes resolved behind closed doors. That way the company has better control over whether and how it does its reporting. At the same time it is more difficult for the counterparty to use publicity as a means to exercise pressure.
Competence of Arbitrators
Another advantage of arbitration is that the parties have the power to choose the persons who resolve the dispute. This ensures that the arbitrators have the exact knowledge and experience that the parties regard as important for just settlement of the dispute.
When the matter is resolved by arbitrators in whose fairness the parties trust, there should be no need for appeals. Arbitral awards are final and appeal on the merits is not possible. Especially with state courts being jammed and trials extending over several years, wasting resources on lengthy legal proceedings is avoided through arbitration, which has been shaped explicitly to serve the needs of the parties with arbitrators having broad powers to agree on and direct the course and time schedule of the proceedings.
A common argument against arbitration is that it is expensive. This could well be argued to be a misconception, at least in comparison to the alternative, court litigation. In a drafting situation, if faced with the cost argument, a party wishing to incorporate an arbitration clause should point out that usually the cost of the arbitrators can be expected to be balanced out by limiting the process to one instance, instead of two, or possibly three, thus limiting the bigger cost of legal counsel. The clause can also stipulate one or three arbitrators, depending on the monetary interest and complexity of the dispute.
It is often forgotten that besides the need of a legal counsel for an extended period, lengthy court proceedings tie up the company’s own resources for the whole duration of the proceeding. The amount of input required from a company’s internal resources often comes as a surprise, and the time spent on lengthy legal proceedings is naturally time away from more productive activities.
In international relationships – especially outside of the EU – enforcement of state court judgements is normally difficult and time-consuming. It usually requires that the matter is retried in all the jurisdictions where a party needs to have it enforced. Regrettably often this results in a situation where a party who has a legitimate claim abandons it after discovering how difficult enforcement would be. An arbitral award on the other hand is directly enforceable in most countries. Also the problem of hometown justice is avoided by arbitration.
It can well be said that an agreement is only as good as its dispute resolution clause. Even if all other terms are carefully negotiated, in the end it is of little help if there are no efficient means of enforcing them.