Anatomy of an arbitration Part I: Why arbitrate?

Tom Cummins, senior associate, London

Speedread

In the first of a new series providing practical insights into the arbitration process, we examine why parties to international contracts commonly choose arbitration over litigation. The article covers familiar territory such as the enforcement benefits of arbitration, the neutrality it offers, the fact that it is more confidential than litigation and the finality of arbitration. It should be of particular interest to anyone new to arbitration and dispute resolution in general.

Full article

Why arbitrate?

Litigation or arbitration? That is one of the first questions that lawyers new to the field of international dispute resolution grapple with. Is it preferable for parties to submit their disputes to the courts of a state, or to an arbitrator, or panel of arbitrators, sitting in a neutral jurisdiction? In practice though, how often do parties negotiating international contracts really spend debating the respective merits of litigation or arbitration? Take a scenario where you have Egyptian and Italian counterparties - the Egyptian party may favour dispute resolution in the Egyptian courts and the Italian in the Italian courts. Neither may be prepared to concede to the other: international arbitration is the compromise. In the words of leading practitioner, Jan Paulsson:

"We can be certain that lawyers' cupboards across the globe are filled to bursting with myriad contracts referring to international arbitration even though each side actually preferred courts. You all see why international arbitration finishes first even though it was perhaps never better than second best in anyone's mind. The problem was that the most preferred alternative of each side was the least acceptable to the other".(1)

That is not to say that international parties are always unwilling to submit to national courts. The English courts see a significant volume of international cases, and the same is true of the New York courts, and those of a (small) number of other jurisdictions. Equally, in certain sectors (for example, shipping and insurance), arbitration will be preferred over litigation (for reasons we explore in more detail below).

But why has international arbitration grown to become the default dispute resolution option for international parties?

Analysis of users' expectations of international arbitration produces similar results. A survey in 2006 found that flexibility of procedure, the enforceability of awards, the privacy of arbitration and the ability of parties to select their arbitrators drove the popularity of arbitration.(2) An influential analysis a decade earlier found that avoiding the counterparty's home court system and taking advantage of the international legal framework for enforceability of arbitration awards were the most important factors. (3)

Why is this?

• First, international arbitration benefits from the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "Convention"). Despite its title, the Convention provides for the enforcement of both international arbitration awards and international arbitration agreements. 148 countries are presently party to the Convention, making it one of the most successful and influential treaties in the field of international commerce. Although enforcement of European court judgments within Europe is relatively straightforward, and certain countries (such as the United Kingdom) have entered into a network of treaties for the reciprocal enforcement of court judgments, the enforceability of arbitration awards, pursuant to the Convention, is one of the principal reasons for arbitration's popularity. The Convention is not perfect: it was drafted half a century ago in a world which bore little resemblance to today's globalised and interconnected economy, and the record of compliance with the Convention in certain regions is mixed. But it remains the case that a party with an international arbitration award is often in a far better position to enforce than a party with a court judgment.
• Second, arbitration offers dispute resolution in a neutral forum. Although the courts of the "seat" where the arbitration is situated may have some role to play in supporting and policing the arbitration, it is generally left to the arbitrators to determine the merits of the dispute. Parties worried about the sophistication, or partiality, of national courts can have their dispute resolved by neutral arbitrators in a neutral forum.
• Third, arbitration proceedings are generally private and the parties can agree that the fact of the arbitration, any information exchanged during it, and the outcome of the process are kept confidential. This makes a stark contrast with litigation, which is invariably public, and involves the parading of "dirty laundry" through the press in high profile proceedings. There is some evidence that the confidentiality of arbitrations is being progressively chipped away, but the nature of arbitration is that it is consensual: parties can seek to agree watertight confidentiality provisions when they agree to arbitrate.
• Fourth, one of the reasons why litigation is unpopular is the perceived opportunity to frustrate the enforcement of any judgment with lengthy appeals. By contrast, arbitration awards are generally final and, where scope exists to challenge them, this is on narrower grounds than that found in national court systems. Arbitration is often more efficient, with "one stop" adjudication substituting for trials and extensive appellate reviews.
• Finally, there are the factors that provided the motivation behind the origins of arbitration: flexibility of the process, speed and efficiency and the ability to select a specialised tribunal of arbitrators with technical experience. Although these remain the reason why, in certain sectors (such as shipping and insurance), arbitration is the preferred choice, their value has diminished as the development of arbitration as a forum for resolving high-value international disputes has resulted in a more formulaic, time-consuming and expensive disputes process. This is a common criticism of arbitration and is an issue that institutions are grappling with.

There are, of course, other countervailing factors in favour of litigating, rather than arbitrating.

If enforcement against assets located outside of the European Union is not a concern, the courts of a well-regarded European Union jurisdiction, renowned for its independent and experienced judiciary, may be satisfactory. Litigation also is better suited to summary determination of disputes (desirable to finance parties who may want to obtain a quick judgment against a defaulting debtor) and multi-party disputes, with the courts able to join parties and consolidate proceedings where appropriate. In the latter case, the consensual nature of arbitration makes joining third parties difficult, although multiparty arbitration agreements, complex though they may be, can be drafted for the purposes of multi-party projects. Leading arbitration rules also have been, or are being, revised in an attempt to make them better suited to multi-party scenarios.

In the words of one expert, arbitration is "the ordinary and normal method of settling disputes of international trade".(4) Enforceability, neutrality, privacy and finality are the principal reasons why this is so. Unless there is a radical change in the landscape for court litigation, this is likely to remain the case. Lawyers' cupboards (and email subfolders) will remain "filled to bursting" with lengthy contracts incorporating short, perhaps barely considered, arbitration provisions. In the next instalment, we will look at the key elements of these provisions, and the means by which parties can avoid the nightmare of litigating over the effectiveness of their arbitration clauses.

Please click on the links below for the other articles in the February 2013 Arbflash:

• Queen Mary 2012 survey on international arbitration practice: snapshot of key findings
• Arbitration in China: CIETAC developments
• Australian High Court considers constitutional challenge to Australia's international arbitration regime
• International round-up
• Investment treaty update
• Frequently asked questions: is my tiered dispute resolution clause binding?

_Notes:

_{(1) International arbitration is not arbitration; Jan Paulsson; John E.C. Brierley Memorial Lecture, McGill University, Montreal 28 May 2008.
(2) 2006 International Arbitration Study: Corporate Attitudes and Practices; Queen Mary, University of London/PriceWaterhouseCoopers.
(3) Arbitration and Mediation in International Business; Christian Bühring-Uhle; Kluwer Law International, The Hague, 1996.
(4) Transnational (or Truly International) Public Policy in Arbitration, in P. Sanders (ed.), Comparative Arbitration Practice and Public Policy in Arbitration 257, 293 (1987).}