Parties should always consider what their preferred method of dispute resolution is when entering into a contract and often choose to specify either arbitration or traditional court proceedings as the relevant legal recourse.
This article provides an overview of the advantages and disadvantages of choosing arbitration compared to the traditional court route.
Arbitration has recently been mentioned significantly in the media in the context of Manchester City Football Club's (MCFC) and the Union of European Football Associations (UEFA) allegations of MCFC's possible breach of the recently imposed Financial Fair Play Regulations (FFPR). If national press reports are to be believed, MCFC will not accept the offer made by UEFA for the alleged breach of the FFPR allegedly comprising a substantial fine, a financial wage cap and a reduction in its Champions League squad size. Consequently the matter may ultimately proceed to an arbitration held by the Court of Arbitration for Sport.
So what is Arbitration?
Arbitration is an alternative to traditional court based litigation. Arbitration is an appropriate form of dispute resolution where the contracting parties are based in different jurisdictions and where a decision of the court of one jurisdiction would not be automatically recognised by the courts of the other jurisdiction. Many parties do not realise that English judgments are not automatically recognised in the American states, China or Japan. For instance, certain procedural steps need to be undertaken first in those jurisdictions. Arbitration is also commonly used to determine complex technical disputes as the arbitrator (akin to a Judge) can be an expert in the technical area in question.
The advantages of Arbitration
Other advantages include:
- It allows either party not to submit to the jurisdiction of a foreign court;
- It is a neutral process which allows the matter to be heard by an arbitrator with specialist experience in the particular area relating to the dispute;
- The parties can elect that arbitration is private and confidential, whereas court cases are normally a matter of public record;
- The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards generally means arbitration decisions are easier and more consistently enforceable in foreign courts compared to Judgments;
- It is often considered less hostile than court proceedings as both parties are encouraged to structure the resolution; and
- Compared to court proceedings, the rules relating to evidence and procedure can be simplified.
- Decisions are final and binding and dependent upon the jurisdiction, there are very few rights of appeal. If parties choose to litigate through the English courts, there are increased opportunities to appeal the decision;
- The parties generally waive their rights to access the court for the matter to be heard by a judge;
- In some cases the costs of arbitration can exceed those of court proceedings and the process may even take longer; and
- Whilst it is generally accepted that arbitration decisions are easier to enforce overseas, the successful party still needs to make an Application to the court to obtain court approval should enforcement become necessary.
How to ensure Arbitration is chosen
To ensure both parties are required to utilise arbitration rather than submit to the jurisdiction of a court, this should be expressed clearly in a written contract. In the absence of an express written agreement, it is possible for both parties to consent to arbitration. However, reaching an agreement can be extremely difficult.
As there are various arbitration bodies which specialise in distinct technical areas, it is also advisable to state which arbitration body is to be appointed as well as:
- the governing law;
- the seat (or location) of the arbitration;
- the number of arbitrators; and
- the language to be used.
This removes any ambiguity, however parties must ensure they make the right choices.
- before finalising a written contract, carefully consider which dispute resolution clause would fit the requirements of the businesses concerned - is it a particularly complex area where it would be advantageous for a dispute to be heard before a true expert in their field rather than a Judge; and
- remember that a vast array of other forms of dispute resolution exist such as mediation - this can better preserve the contractual relationship even when it is being tested and can be faster and more cost effective. Equally, expert determination could satisfy any technical points without necessarily involving the restrictions of an arbitration process.