In this guide our business dispute solicitors discuss what arbitration is, the importance of including an arbitration clause in your contracts and how much arbitration costs compared to other forms of dispute resolution.
If you’re considering arbitration as a way to resolve a business dispute or want advice on including arbitration clauses in your contracts, contact our experienced business dispute solicitors. We’ll help you understand the process, costs, and benefits so you can make informed decisions for your business.
Here we will discuss:
- What is arbitration and why does it matter for your business?
- Is arbitration legally binding?
- What are the advantages and disadvantages of arbitration?
- Which type of arbitration works for business?
- What does a good arbitration agreement look like?
- What common mistakes should I avoid when drafting arbitration clauses?
- What is a badly drafted (pathological) arbitration clause and why avoid it?
- How much does arbitration cost compared to court?
- Can arbitration awards be appealed?
- How are arbitration awards enforced in the UK?
- How does the Arbitration Act 2025 amend the Arbitration Act 1996?
- Summary
What is arbitration and why does it matter for your business?
Arbitration is a way to resolve a dispute without going to court, and it is consensual, private and confidential. The right or obligation to arbitrate is contractual (i.e. it arises in connection with a contract) and subject to very limited exceptions, the decision of an arbitrator is binding and final.
Like a judge, arbitrators are under a duty to act fairly and impartially. They will apply the same rules of law as a court and, unless agreed otherwise, the same rules of evidence.
If there is a valid and enforceable arbitration clause, you are obliged to resolve your dispute by arbitration. That said, it is possible for the parties to waive the right to arbitrate in favour of litigation by agreement.
The process is broadly similar to litigation in the sense that there is a document that initiates the arbitration process and sets out the claim. The other side has an opportunity to reply. An arbitration tribunal is formed (either a sole arbitrator or a panel of three arbitrators), and the arbitration proceeds in accordance with the agreed rules. Generally, this involves written submissions, witness statements and document disclosure. All of which leads to a hearing and a binding decision being issued.
Is arbitration legally binding?
Unlike forms of alternative dispute resolution (ADR) such as commercial mediation or expert determination, you should be aware that the outcome of arbitration is binding on the parties. Decisions are final, with a limited possibility of appeal. Arbitration decisions are also widely enforceable both nationally and internationally.
What are the advantages and disadvantages of arbitration?
Advantages
- Unlike court proceedings where a judge is assigned to your case, arbitrators are appointed by agreement. There are many qualified arbitrators to choose from, and you are free to choose someone with specific technical experience i.e. an architect arbitrator.
- You are free to agree on the rules governing the arbitration, and that freedom means you can tailor the rules as you see fit.
- Subject to limited exceptions, arbitration is confidential (evidence, hearing and the final award). Exceptions include details of the arbitration and any award being made public during any court challenge or enforcement, if there is a need to disclose details of the arbitration to a third party such as an auditor, if disclosure of a document is court ordered or if it’s in the public interest.
- Arbitration awards are final and can only be challenged in the courts in limited circumstances.
- Arbitration, whilst expensive, is generally cheaper than litigation.
- Arbitration cases are generally resolved quicker than cases that go through the courts.
Disadvantages
- An arbitrator can refuse to release their decision until their fees have been paid. This means one party may have to pay the full fee to get the award before having to recover the other party’s share from them.
- The costs of arbitration may, in some cases, be more than the costs of court proceedings.
- The requirement to disclose documents is less onerous compared to litigation, but this can lead to relevant documents being withheld.
- The fear of public court proceedings can play a role in encouraging the parties to settle, whereas the confidential nature of arbitration makes settling less likely.
- Whilst arbitrators can do most things that a judge can do, either on its own initiative or with court support, their powers of coercion are generally more limited.
- Awards can only be challenged in limited circumstances.
Which type of arbitration works for business?
You have two choices. Either you can opt for a recognised institution to help you (institutional arbitration), or you can opt for what is known as ad hoc arbitration.
Institutional arbitration: There are around 1200 institutions worldwide that offer arbitration services, and some focus on a particular industry. Each has their own rules and list of recommended arbitrators and will administer the arbitration if so selected. The costs of institutional arbitration can be considerable, as on top of paying a fee for the services of a sole or panel of arbitrators, you have to pay venue and institutional administration fees too.
The reasons for choosing one institution over another are beyond the scope of this guide, but our experienced business dispute solicitors will recommend the right arbitration institution for your dispute if appropriate.
Ad hoc arbitration: If you opt for ad hoc arbitration, you and the other party get to determine all aspects of the arbitration yourselves, including the number of arbitrators and the procedural rules. An arbitration institution won’t be involved, there are no institutional fees to pay, and you won’t receive any institutional support either. Rather than design an entire set of procedural rules from scratch (although you are free to agree on these with the other party), most businesses use an existing framework such as the UNCITRAL Rules.
What does a good arbitration agreement look like?
A good arbitration agreement needs to be clear and unambiguous, and there are a number of key points that should be agreed and documented in order to reduce the risk of any aspect of the arbitration process or the award being challenged:
- Which disputes are to be dealt with by arbitration?
- How many arbitrators (sole or a panel), and what should their qualifications be?
- State the seat of arbitration (this clarifies the governing procedural law and which courts will have supervisory jurisdiction).
- Which country’s laws will govern the arbitration agreement? This may be different from the law that governs the underlying contract between the parties.
- Where will the arbitration be held?
- Specify an arbitration institution (e.g. LCIA or ICC) or set of rules (e.g. UNCITRAL) that will govern the process.
- Specify the language to be used for written submissions and during the hearing.
- Stress the importance of confidentiality (e.g. proceedings, documents and awards to remain confidential and shall not be disclosed except as required by law).
- Clarify how you wish costs to be dealt with (e.g. each party bears their own costs and expenses with the arbitrator’s fees being shared unless the arbitrator rules otherwise).
- Clarify the parties’ intentions on the right to appeal an arbitrator’s award on a point of law. Do they wish to waive this right?
- Clarify the parties’ intentions on enforcement (e.g. the award shall be capable of enforcement in any competent court having jurisdiction).
What common mistakes should I avoid when drafting arbitration clauses?
There are a whole range of mistakes that should be avoided when drafting an arbitration clause, but the most common mistakes to avoid include the following:
- Failing to address a term that is critical to the effective functioning of an arbitration or including terms that are confusing or contradictory.
- Specifying arbitrator qualifications that are unclear, not appropriate or overly restrictive (in a leading case in this area, a QC with 10 years of experience in insurance or reassurance was removed because he didn’t have experience in the business of insurance or reassurance itself).
- Referring disputes to arbitration institutions that don’t exist or to incorrectly identified institutions.
- Not being clear that arbitration is mandatory by referring to alternative dispute resolution in general terms.
What is a badly drafted (pathological) arbitration clause and why avoid it?
A pathological arbitration clause is a clause that is so poorly drafted or ambiguous that it becomes difficult or impossible to enforce. The English courts will try to give effect to the parties’ intentions, but this won’t save a clause that, according to a leading authority on arbitration, causes 'hopeless confusion.'
If there is any confusion about the drafting of an arbitration clause, it may prevent the entire dispute from being resolved by arbitration. It may require a judicial ruling on the issue too, which will increase costs and lead to a delay in the overall resolution of the dispute. Below are two examples of clauses that ended up in the courts.
- 'arbitration, if any, by ICC Rules in London'
The court held that this wording did create an unconditional agreement to arbitrate. - 'the parties will endeavour to first resolve the matter through Swiss arbitration. Should a resolution not be forthcoming, the courts of England shall have non-exclusive jurisdiction.'
The court held that this wording did not give rise to a binding agreement to arbitrate, as part of the clause suggests arbitration, whilst the other suggests litigation.
How much does arbitration cost compared to court?
Arbitration is usually cheaper than going to court, but costs can still be considerable. Arbitrators have wide discretion on the issue of costs, and they may allocate the costs between the parties as they see fit, subject to agreement between the parties.
The arbitration tribunal will award costs based on the principle that costs should follow the event (i.e. the successful party is entitled to recover costs from the unsuccessful party) except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.
Can arbitration awards be appealed?
Arbitration awards are intended to be binding and final, and there is no automatic right to appeal. In limited circumstances an appeal to the High Court may be possible on a point of law. This right can be excluded by agreement.
Challenges can also be made to the tribunal’s substantive jurisdiction (e.g. the validity of the arbitration agreement, the tribunal’s jurisdiction or the tribunal exceeded its powers) or if there has been a serious irregularity affecting the tribunal, the proceedings or the award. Neither of these challenges can be contracted out of.
Upon receipt of a point of law challenge, the High Court may confirm the award, vary the award, remit the award to the tribunal, in whole or in part, for reconsideration in light of the court’s determination or set aside the award in whole or in part.
Upon receipt of a jurisdiction challenge, the High Court may confirm the award, vary the award, or set aside the award in whole or in part.
Upon receipt of a serious irregularity challenge, the High Court may remit the award to the tribunal, in whole or in part, for reconsideration, set the award aside in whole or in part, or declare the award to be of no effect, in whole or in part.
How are arbitration awards enforced in the UK?
Arbitration awards are widely enforceable both nationally and internationally, and with court approval, they can be enforced in the same manner as a judgment or order of the court. The only ground for refusing permission to enforce an award is where the tribunal lacked jurisdiction to make the award.
In practice, this means that if an arbitrator awards you a sum of money and that sum isn’t paid, you can seek to enforce your award through the courts as if the courts had awarded you judgment or an order to that effect themselves, and there are several enforcement options to consider. These include a third-party debt order (against the other party’s bank), a charging order (against a property owned by the other party), and instructing bailiffs to seize and sell the other party’s assets.
Any enforcement action is subject to the usual six-year limitation rule. This means you have six years to pursue any enforcement action, and the time runs from the date the right to enforce the order arises.
How does the Arbitration Act 2025 amend the Arbitration Act 1996?
The 1996 Act has stood the test of time, but for London to compete with other jurisdictions as a centre for arbitration excellence, the 2025 Act introduces the following reforms:
- A default rule on governing law.
- Summary disposal powers.
- Increased arbitrator immunity.
- A duty to disclose any circumstances that might affect an arbitrator’s impartiality.
- Simplifies the process for challenging a tribunal’s substantive jurisdiction.
Summary
Arbitration can be an efficient, cost-effective and confidential way to resolve a business dispute, and if you are facing an arbitration or wish to resolve future disputes by way of a well-drafted arbitration clause, our business dispute solicitors can help. They have extensive experience of domestic and international arbitrations and enforcing awards in the courts to
