IHL series: International Arbitration or Litigation

To support our IHL community, on 1 December we hosted our latest webinar on “International Arbitration or Litigation?” where we discussed the difference between litigation and arbitration, dispute resolution clause drafting issues and the potential impact of Brexit. Here are the key takeaways:

What is the difference between litigation and arbitration?

Litigation:

• Is where the parties, by agreement or default, use the court system to adjudicate the dispute
• Is largely free (in the sense of not paying for use of the court system or judicial time)
• Is not usually confidential (which can be an advantage if you want to set a precedent)
• Is flexible, in the sense that court procedures will vary according to the size and nature of the dispute
• Allows for judgments to be appealed
• Is dependent on various treaties and conventions to allow for reciprocal enforcement of judgments in other countries

Arbitration:

• Operates by agreement between the parties (usually in the contract, but can be ad hoc)
• Allows the parties to choose or nominate their tribunal
• Has to be paid for by the parties
• Is usually confidential (but that depends on which arbitration rules are chosen)
• The right to appeal depends on the place of the arbitration and the arbitration rules and, if allowed, the grounds are typically very limited. Awards can be challenged but, again, on limited grounds.
• Allows for international enforcement of arbitration awards via the New York Convention (in around 165 countries)

Which should you go for in a dispute resolution clause?

• If confidentiality is likely to be important, arbitration is likely to be the better choice
• As matters stand, there are some uncertainties regarding jurisdiction/enforcement in other EU countries post Brexit, which again might favour arbitration for contracts where one party is in the UK and one party is in the EU (or indeed if enforcement in the EU is likely)
• But litigation might be preferred if there are no confidentiality issues, and the parties (and their assets) are in the UK
• Consider which option will give you a tactical advantage should disputes arise. For example, if you are likely to be on the receiving end of claims, would you rather that UK courts have jurisdiction ? Conversely, would a mandatory reference to arbitration deter volume claims?

What should a dispute resolution clause say?

First and foremost, it needs to be enforceable, and so must be clear as to which route the parties have chosen.

If arbitration, then the clause needs to cover:

• The governing law, that is the law according to which the tribunal will decide the dispute
• The seat of arbitration (which will govern, amongst other things, the extent of any involvement by local courts). There is no need for the governing law and the seat of arbitration to be the same. The parties might, for example, agree that the governing law be the law of either parties ‘home‘ jurisdiction, but not want the place of arbitration to be that country because of concerns over the approach of the local courts to arbitration.
• Which arbitration rules will apply and govern procedure. The LCIA and ICC rules are common choices, but you should consider how rules differ on issues such as costs, joinder of parties, consolidation, expediated arbitration, etc.
• The number of arbitrators that will constitute the tribunal. This is usually one or three, but the number might be mandatory under the law of the place of arbitration.
• The language of the proceedings
• The LCIA and ICC websites include template arbitration clauses.

Is there a preferred seat of arbitration?

• London is a safe bet but there are other choices too. Check, if possible, that the approach of the local courts is pro-arbitration and that the courts have a track record of this in practice. This might involve taking some local legal advice.

What is the impact of Brexit (and Covid)?

• Has undoubtedly put dispute resolution clauses under the microscope. As noted earlier, concerns over jurisdiction/enforcement in other EU countries might increase the use of arbitration clauses but this is likely to be a relevant consideration only where a party is based in another EU country/enforcement is likely to be required over assets in another EU country.
• Unlikely to be any real impact on arbitration as such – both the English Arbitration Act 1996 and the New York Convention will remain in force
• Likely to see increased volumes of litigation on issues such as force majeure, supply chain disruption, and insurance coverage. Similarly seeing more activity in arbitration, and likely to see an increase in investment arbitration as well as commercial arbitration. Investment arbitration is between a foreign investor and a host State and arises where the investor alleges that its investment has been frustrated (or destroyed) by actions of the State.