Should you arbitrate your disputes? A quick guide on the advantages of arbitration and how to avoid expensive mistakes in your arbitration clause

In many cases, and in particular for cross-border matters, arbitration can be hugely advantageous in resolving disputes, as compared to court litigation.  It is therefore important that parties fully consider, at the time of their deal or contract, how to deal with any disputes.  If parties do not consider this question at the outset, they may well miss out on the many advantages that arbitration can bring.

The advantages of arbitration include:

Confidentiality: Generally speaking, arbitration is confidential, which means that the arbitration, the documents produced during the arbitration, and the final award are not public.  Parties may wish to deal with their disputes in a confidential way, but there is a particular advantage where the substance of the dispute may be commercially sensitive (for instance, in relation to investment strategies or pricing/profit formulae).

Flexibility: Arbitration is very flexible.  The consensual nature of arbitration means that the parties can choose exactly how to resolve their dispute.  In particular, parties can tailor the procedure of the arbitration to ensure it is as efficient and as low-cost as possible.

Expertise: Unlike a judge in the courts, the parties to an arbitration may choose their own arbitrators.  This can be particularly helpful in cases where the resolution of the issues is assisted by expertise in a specific area – for instance, in relation to complicated investment products, or other areas such as engineering.

Neutrality: Arbitration is a neutral forum.  A neutral forum is very attractive where the national courts of one party might be subject to bias (i.e. in favour of the "home" party).

Finality: As a matter of English law at least, there are limited grounds under which a party may appeal an arbitral award and, in fact, parties are able to opt-out of that limited right of appeal altogether.  This adds to the finality of arbitration awards and avoids lengthy and costly appeals that can occur in the courts.  That said, a losing party may see finality as a disadvantage.

Ease of commencement: In cross-border litigation, parties are often required to seek permission of the court to serve claims out of the jurisdiction and/or conduct lengthy and costly processes to effect service of the claim.  No such limitations apply in relation to arbitration and claims are generally commenced by lodging a short document with the appropriate arbitral institution.

Ease of enforcement: It can be difficult to enforce foreign court judgments, particularly where there are no applicable enforcement treaties.  Conversely, arbitration awards can be enforced with reasonable ease between the wide range of countries that are party to the New York Convention (currently 172 countries).  Therefore, it is often easier to enforce an arbitral award against a foreign party than a court judgment, particularly in emerging markets.

The basic principle of arbitration is party autonomy – i.e. it is a consensual process.  Therefore, it relies on agreement between the parties as to the scope and procedure of the arbitration.  This agreement can be express, by incorporation of established procedural rules, or by devolving such decisions to the arbitrator (or a combination of all three).  Often such matters are dealt with in the arbitration clause.  However, this means that a poorly drafted arbitration clause, which is either unclear or incomplete, can lead to expensive and time-consuming satellite disputes before the parties get to the substance of their dispute.

They key components of a well-drafted arbitration clause are as follows:

Scope:  It is important to set out clearly the scope of matters that will be referred to arbitration.  For instance, is it all matters relating to the relevant contract, or just certain issues?

Seat: The seat is the "legal place" of the arbitration (which is different to the mere venue of any hearings).  The seat of the arbitration will set the procedural laws that apply and the powers of the supervisory court in relation to the arbitration (for instance, to grant relief in support of the arbitration or otherwise intervene in the arbitral process in a variety of ways).

Institutional or ad hoc arbitration: An institutional arbitration is one in which an institution administers the arbitration for the parties.  Often parties will adopt the procedural rules of an institution to govern their arbitration, such as the LCIA or ICC.  Different institutions have different strengths, rules and fees, and those should be considered when choosing an institution.  In an ad hoc arbitration, the arbitration is administered by the parties, and they will have to determine the procedure themselves.

Number of arbitrators: It helps to be clear about the number of arbitrators (usually one or three).  Often institutional rules have a default of one arbitrator, except where the parties agree otherwise, and also set methods of selection.  For more complex disputes, or disputes that might benefit from both legal and technical expertise on the panel, the parties might want to consider appointing three arbitrators and agreeing the process for selection of those arbitrators. 

Governing law of the arbitration agreement itself: An arbitration agreement is "separate" from the underlying contract – i.e. the relevant clause is a contract in and of itself.  Therefore, the arbitration agreement will be subject to its own governing law, which may be different to that of the underlying contract.  If the parties wish for the arbitration agreement to be subject to a specific governing law, we recommend setting that out expressly.

Other procedural matters: Where the parties have other procedural wishes that have not been incorporated by their chosen institutional rules, they should also be set out in the clause itself.