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.
Here we will discuss:
- What is arbitration?
- What are the advantages and disadvantages of arbitration?
- How is arbitration regulated?
- Who chooses the arbitrator?
- Is arbitration legally binding?
- Is arbitration suitable for complex disputes?
- Are arbitration proceedings private?
- At what point do the parties agree to arbitration?
- Types of arbitration
- What is the arbitration process?
- What is the cost of arbitration?
- Can an arbitration award be challenged?
- How are arbitration rules applied?
- Summary
What is arbitration?
Arbitration is a form of dispute resolution. Instead of going to court if you find yourself in dispute with another business, you can submit your dispute to an arbitrator, whose decision is binding. The location and procedure for arbitration are usually agreed in the contract between the parties.
What are the advantages and disadvantages of arbitration?
Advantages of arbitration
Below are some of the key advantages of the arbitration process:
- Speed: generally, the arbitration process is faster than the court process.
- Flexibility: the arbitration tribunal tailors the process to the dispute in question.
- No need for separate expert evidence (as is the case in court proceedings) where the arbitrator is an expert in the subject matter of the dispute.
- Confidentiality: arbitration proceedings are held in private and are confidential.
- An element of control: the parties themselves can select the number and identity of the arbitrators they wish to appoint in the arbitration clause in the contract.
- Binding awards: an award made by an arbitration tribunal is binding on the parties.
- Enforcement: enforcement of an arbitration award is more straightforward both domestically and internationally.
- Certainty: having an arbitration clause in the contract gives everyone a degree of certainty about how a dispute will be dealt with.
- Neutrality: the parties can decide on an arbitrator and a venue in a neutral jurisdiction rather than relying on the courts of one party’s country.
Disadvantages of arbitration
The following are some of the main disadvantages of arbitration:
- Cost: it’s important to be aware that it isn’t always the case that arbitration will cost less than going to court.
- Narrow scope for challenge: the opportunities for challenging or appealing an arbitration award are very limited, which could be seen as a negative if there are flaws in the arbitration process.
- Multi-party disputes: arbitration may be less effective in these circumstances.
- Bias: sometimes an arbitrator’s bias can be reflected in their decisions.
How is arbitration regulated?
The Arbitration Act 1996 (the AA) regulates arbitrations that take place in or ‘have their seat’ (to use the legal term) in England and Wales. It gives parties to arbitration much greater control than before the Act was created because it restricts the powers of the courts to influence arbitration proceedings.
Who chooses the arbitrator?
The responsibility for choosing an arbitrator or arbitrators usually falls on the parties to the dispute, but it’s important to check the terms of the arbitration clause in the contract first to find out exactly what’s been agreed when it comes to the number of arbitrators to appoint, which can be one or more up to a total of three, and any processes that have to be followed. If there’s no agreement on this, institutional rules will apply.
It's worth highlighting that tribunals in international arbitrations are normally made up of one or three arbitrators, three being standard for disputes that involve complex issues and are of high value.
Is arbitration legally binding?
Unlike forms of alternative dispute resolution (ADR) such as commercial mediation, early neutral evaluation 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.
Is arbitration suitable for complex disputes?
The arbitration procedure is attractive to businesses involved in complex commercial disputes. This is because the process is run by an arbitrator, who usually has some expertise in the subject matter in question that a judge may lack. This helps to reduce the time and expense involved in instructing independent experts to clarify technical matters to a court overseen by a judge.
Are arbitration proceedings private?
Arbitration proceedings are normally held in private, which gives reassurance that the possibility of sensitive information about your company becoming public is minimised.
At what point do the parties agree to arbitration?
Parties must agree to arbitration, and the decision to use arbitration is taken when the original contract is entered into. This means care should be taken when you or your lawyer is drafting the arbitration clause in your commercial contract.
We deal with arbitration agreements in more detail below, but key considerations include:
- Specifying where the arbitration will take place
- What arbitration procedure will be used
- How the arbitrator will be chosen
- Whether any limits should be placed on the arbitrator’s power to take decisions
Types of arbitration
It’s important to take care when crafting the right arbitration clause for your contract. In practice, the arbitration clause is often left until other commercial terms are agreed, which can result in terms that aren’t always as carefully thought out as they could be.
Because the arbitration process is flexible (you and your opponent can decide how it will operate), it’s always worth considering how an arbitration might run if you were to encounter one further down the line. You may choose either for a recognised institution to assist you (‘institutional arbitration’), or you may opt for what is known as ‘ad hoc arbitration’. Ad hoc arbitration will follow rules designed by you and the other party, backed up by any default rules that operate where the arbitration itself is taking place.
What is institutional arbitration?
National and international institutions have broadly similar approaches to arbitration. In some areas, big differences exist in relation to issues such as confidentiality and costs. This means that when you’re drafting an institution-specific arbitration clause, it’s crucial to ensure that the correct choice of arbitrator is made. An experienced dispute resolution solicitor will be able to recommend an appropriate arbitral institution for your business dispute.
What is ad hoc arbitration?
If you opt for ad hoc arbitration, you and the other party will decide on the procedural rules yourselves. This means that an arbitral institution won’t be involved, and you won’t receive any institutional support. Rather than design an entire procedure from scratch, parties often use an existing framework – such as those developed by the United Nations Commission on International Trade Law (‘UNCITRAL’) – to run an ad hoc arbitration.
The chief advantage of ad hoc arbitration is its bespoke nature: you can tailor the rules to suit the dispute in question. The lack of institutional support and restricted access to experts available through this type of arbitration means it’s often a less attractive option for businesses in need of arbitration.
It’s worth highlighting here that even ad hoc arbitration must comply with relevant laws of the country in which the arbitration takes place. For example, under the Arbitration Act (as applicable to England and Wales), the rules of natural justice must be observed, and parties must have a right to challenge the award in certain circumstances.
There are also sector-specific types of arbitration, including rules developed for the construction and shipping industries, as well as rules for arbitration in commodity disputes.
What is the arbitration process?
The main steps in the arbitration process are as follows:
- When a dispute arises under a contract and there is reason for that dispute to be referred to arbitration – whether ad hoc or through a recognised institution – a party wishing to begin arbitration sends a ‘notice to arbitrate’ to the other side.
- If an institutional arbitration is being carried out, the body in question will state what the notice should contain. Typically, it will include a description of the claim and, if appropriate, the institution will nominate an arbitrator.
- The responding party will need to reply within a given time and nominate its preferred arbitrator.
- The arbitration panel or tribunal must then be formed in accordance with the rules of the correct institution. Usually, a single arbitrator or a panel of three will oversee the process.
- With input from the arbitrator(s), the parties will narrow down the issues to be resolved and prepare a timetable for the process.
- The arbitration then proceeds in accordance with the rules of the institution or the ad hoc rules developed by the parties. Generally, there will be provision for producing written submissions, witness statements and exchange or disclosure of documents between the parties.
- A hearing or hearings will take place where lawyers will appear before the tribunal to present arguments and challenge the other side’s position.
- The tribunal then announces its decision or ‘award’.
What is the cost of arbitration?
Arbitration can be generally cheaper than court litigation, depending on the number of arbitrators and the venue – but it can still result in significant costs for you and the other side. At its core, arbitration is carried out by agreement. So, whilst there are rules about how costs may be incurred following arbitration, these aren’t binding.
This point is reflected in the Arbitration Act itself. It states that:
- The tribunal may make an award allocating the costs of the arbitration as between the parties, subject to any agreement they have made.
- Unless the parties agree otherwise, the tribunal shall award costs on the general principle that ‘costs should follow the event’ (meaning that the successful party is entitled to an order to recover costs from the unsuccessful side) – except where it appears to the tribunal that it’s not appropriate in relation to the whole or part of the costs.
In terms of costs, it’s also important to note that:
- Arbitrators have a wide discretion when it comes to the issue of costs
- Parties can decide amongst themselves how to divide costs
- If arbitration is being carried out with the support of an institution, that body may have its own rules about costs. These must be taken into account if so.
Can an arbitration award be challenged?
The arbitration award may, in some circumstances, be challenged. These circumstances depend mainly on the terms of the contract, the rules of the relevant arbitral institution and the rules of the seat in which the arbitration was held. Under English law, for example, there are strict time limits if one side wishes to challenge an arbitration award.
The grounds for challenge are also limited in scope. They include:
- The award failing to address all the issues
- Ambiguity or a mistake in the award
- Serious irregularity in the conduct of the arbitration
- The tribunal lacking the correct jurisdiction
- A mistake of law contained within the award
How does the enforcement of arbitration awards work?
The process of enforcement begins by the party in whose favour the award was made submitting the award, which takes the form of a written decision made by the arbitrator(s) who oversaw the dispute, to the relevant court (either in the UK or abroad, depending on where the award needs to be enforced). Once the court has reviewed the award, it can issue an enforcement order. The party relying on that award will then have to decide how it wishes to enforce it – for example, this might involve seizing assets or funds – and this is likely to involve additional legal steps.
How are arbitration rules applied?
The rules governing arbitration will depend on what the arbitration agreement says. Often, the agreement will state that the rules of a particular arbitration institution will apply to the process. These will usually cover issues such as when the arbitration procedure can begin, how the tribunal is to be set up and what procedures are to be followed. If the arbitration is ad hoc, you must agree with the other side the rules that will apply – subject, of course, to any set rules that apply in the jurisdiction. These rules vary between institutions, so you should always seek legal advice before committing to the authority of a particular institution.
Summary
Arbitration can be an efficient, cost-effective, streamlined and confidential way to resolve a business dispute, but it’s vitally important to make sure that there are clear arbitration clauses inserted into your commercial contracts before your relationship with the other party formally begins. This means that the process is likely to be more straightforward to manage if a problem does arise, but if this happens, our specialist litigation and arbitration solicitors are well equipped to support you when it comes to both domestic and international arbitration.
