The Advantages of International Arbitration Over Litigation
At Youssef + Partners, we understand that the international business world is increasingly complex and that cross-border disputes between companies can happen for a number of reasons.
There are traditionally two ways to settle disputes: arbitration and national courts litigation. Unfortunately, litigation often fails to resolve these conflicts in an acceptable way.
Litigation can be time-consuming, costly, exposes the conflict to the public, can be decided by judges without sufficient expertise on the issues.
On the other hand, arbitration can be a better solution. The arbitration process is usually more efficient, with potential cost savings, confidential and provides for a more tailored approach to resolving disputes including the appointment of expert arbitrators to decide the matter.
Considerations in International Arbitration normally involve factors such as the choice of venue, the applicable law, and the enforceability of the award across different jurisdictions, all of which contribute to the flexibility and effectiveness of this dispute resolution method.
In this article, we discuss the specific advantages of international arbitration over litigation and show how it can be a valuable tool for companies seeking to manage their legal risks effectively.
Advantages of International Arbitration
International arbitration offers several significant benefits for resolving cross-border disputes. Here are some of the key advantages:
Understanding Arbitration and Litigation
Businesses often have two main options for resolving legal disputes: arbitration and litigation. Each approach has its unique characteristics. Understanding the distinctive characteristics and differences of each can help you discern the right option for your specific situation.
- Litigation is the traditional legal process that involves a formal national court case. Typically, cases are open to the public and usually involve a judge with various trainings and expertise, but who may not have specialized knowledge or experience on certain industries. Litigation follows strict procedural rules and is often long, expensive, and unpredictable.
- Arbitration is another legal process that is more flexible and confidential. In this process, when entering into contractual relationships, parties agree to submit their disputes to one or more neutral arbitrators. The arbitrators are typically experts in the field related to the dispute and have the authority to make binding decisions. Arbitration proceedings are largely confidential, benefiting businesses that need to protect sensitive information.
It’s also important to distinguish between arbitration and international arbitration. Arbitration refers to the process of resolving disputes between parties through neutral arbitrators, regardless of their location. Understanding these differences will help businesses make informed decisions on which method best suits their needs for dispute resolution.
In the following sections, we will discuss the advantages of international arbitration over litigation.
Neutrality and Impartiality
One of The Benefits of International Arbitration, over national courts’ litigation, is its neutrality. The arbitrators are independent third parties appointed by the parties or an arbitration institution. They have no previous relationship with either party or with their counsel.
On the other hand, with a litigation process, depending on the jurisdiction where the dispute is located, judges may be more likely to allow their personal and professional biases affect their decisions.
The neutrality and impartiality of the arbitration process contribute to more trust. It allows for both parties to feel more confident about a fair and just settlement.
Expert Decision-Making: Tailored to the Dispute
The advantages of international arbitration over litigation also include choosing arbitrators who have specialized knowledge that is the focus of the dispute.
Why is this a great advantage? For one, it enables the selection of arbitrators who have extensive knowledge of the industry, commercial practices, real-life experience as practitioners in the area of dispute, and technical understanding that is relevant to the case.
On the other hand, in a litigation case, judges may not have been exposed to the specialized branches of law or business. They may also be influenced by long term domestic judiciary trends of the relevant jurisdiction that diverges from global practicing trends. Judges are usually under time and budget constraints that severely limit their ability to dedicate and focus on the detailed facts of the dispute, the detailed arguments presented by the parties, and the technicalities that must be addressed by expert witnesses on the matter at hand.
The intricacies of the subject matter can be crucial to determining a fair award, especially in complicated disputes in technical or industry-related affairs.
Appointing industry arbitrators is by far more likely to ensure a fair and informed award. But even more important is that the arbitrators have specialized knowledge to expedite a just resolution to the dispute, which satisfies both parties. They are also more likely to be open to considering the factual details of the case and the technical aspects presented by expert witnesses based on their extensive experience addressing such matters.
This is where the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also called the New York Convention) comes into play.
This convention was adopted in 1958 to ensure that other parties recognize and enforce arbitration awards issued in one country. Businesses can depend on this convention to recover their assets in international disputes.
Conversely, the process of enforcing foreign judgments can be long and confusing and may include legal and procedural hurdles in the jurisdiction where enforcement is sought.
Litigation, as a result, carries far greater challenges, costs, risks and uncertainties for cross-border disputes parties. Arbitration lowers available legal challenges, costs, risks, and uncertainties streamlining a defined enforcement process, diminishing grounds and venues for challenges against enforcement, ultimately enhancing the chances of collecting what the party has been awarded by the arbitrators.
Stay Updated
The Speed and Efficiency of the Process
Another advantage of international arbitration over litigation is the overall speed and efficiency of the process. By comparison, litigation is usually more prolonged and must follow rigorous procedures. The process may also involve lengthy appeals.
However, contrary to the above, both parties can tailor the arbitration process to expedite it, leading to a shorter time to reach a final award. This can create more flexibility, ensuring the real issues of the dispute are the focus. The result can be reduced operational disruption, financial losses, and reputation damage.
In addition, discovery in arbitration has a more limited scope compared to litigation in some jurisdictions. Discovery limitations also save money, time, and resources. On the other hand, in the jurisdictions where discovery is simply not allowed, limited discovery can be an important additional tool to access important information to assist in the grounding of your case.
Here again the New York Convention comes into play. Because of the extensive application of this convention, the process for enforcement of an award typically involves procedures that are less complex and more directly allow for the enforcement of an international arbitration award as compared to the lack of international agreement on the enforcement of foreign court decisions.
Confidentiality: Safeguarding Trade Secrets
The confidential nature of arbitration is one of the main reasons it is favored by international businesses. Unlike national court cases filed in open courthouses, arbitration hearings are closed to the public.
This means that business information is kept away from competitors, other companies, and anyone interested. This can be crucial for entities in highly competitive or sensitive sectors such as technology, medicine, or finance.
The arbitration process keeps a company’s trade secrets, confidential information, and business strategies from being disclosed to third parties.
In addition, with the privacy offered by arbitration, business dealings in a dispute can be friendlier and more cooperative.
When parties realize their dispute is confidential, they may be more amenable to focusing on the relevant issues at hand as opposed to posturing, and more open to constructive negotiations and exploring opportunities for settlement.
Thus, arbitration can be faster and more amicable, which is usually unlikely in a litigated proceeding.
Flexibility: Fine-Tuning the Arbitration Process
International arbitration offers more flexibility than litigation regarding procedure, evidence, and remedies. The parties can agree to the method used to appoint arbitrators, the location or seat of the arbitral process, the governing law, and the language of the proceedings.
These controls allow businesses to fine-tune the process to fit their needs and procedures, making arbitration more efficient, less costly and more just.
Conversely, procedural rules in litigation are typically rigid, surprising at times, often incongruent with real-life commercial practices, ultimately potentially seriously preventing a party from putting forward its best case and arguments. Lack of flexibility can lead to surprises, blocks, delays, higher costs, and often less satisfactory outcomes where one of the parties feels that justice has not been observed.
The arbitration process promotes a collaborative and efficient approach by allowing parties to shape it so that parties can have an expectation to have their proverbial day in court, knowing that they will be heard, by experts in the field at hand chosen by the parties themselves.
Cost-Effective Process
Another one of the advantages of international arbitration over litigation is the value it offers. In many cases, upfront arbitration costs can be higher to those in litigation in some jurisdictions.
However, with arbitration, the overall costs can usually be lower due to the reduction in discovery available in some jurisdictions, expedited procedures, and the elimination of drawn-out court processes.
It is possible for an arbitration case to be expensive based on several factors, including:
Complexity of the case
- Number of parties
- Number of arbitrators involved
- The institution that administers the procedures
In this case, careful consideration must be made for the arbitration process to remain cost-effective. The introduction of cost-saving measures can result in additional savings for those involved in the case. Cost-saving measures can include limited expert testimony or providing documents via email, video conferencing, choice of appropriate language and submission of unofficial translations, etc.
Here again the New York Convention comes into play. Because of the extensive application of the convention, the process for enforcement of an award typically involves procedures that are less complex and more directly allow for the enforcement of an international arbitration award as compared to the lack of international agreement on the enforcement of foreign court decisions.
Ultimately, the possible higher costs in the initial arbitration process is largely outweighed by the overall cost savings of a streamlined process of enforcement of an arbitration award, wholly side-stepping various procedural litigation steps and challenges that could have ultimately doomed any enforcement of a foreign court decision. Therefore, considering the totality of the processes, arbitration usually ultimately provides a cost friendlier process.
The Role of Arbitral Institutions
Arbitral institutions play an integral role in international arbitration. These institutions are organizations that oversee and administer the arbitration process. They ensure that disputes are resolved fairly, efficiently, and in accordance with well-established objectively neutral procedures.
The institutions also provide a structured framework for the process by offering a set of flexible rules and guidelines to ensure consistency, impartiality, and transparency.
Some prominent examples of international arbitral institutions include:
- International Chamber of Commerce (ICC)
- London Court of International Arbitration (LCIA)
- Singapore International Arbitration Centre (SIAC)
- American Arbitration Association (AAA)
In international arbitration, these institutions play an essential role by facilitating and overseeing the proceedings and maintaining neutrality. They help resolve procedural disputes, manage fees, and ensure that arbitrators are impartial, independent and qualified.
They also provide enforcement of arbitration awards, which are usually recognized under international agreements, such as the New York Convention. By offering expertise and administrative support, arbitral institutions are essential to resolving complex cross-border disputes efficiently and fairly.
Limits of the Arbitration Process
While there are advantages of international arbitration over litigation, it’s important to also consider the limitations of the process, including the following:
Limited judicial review: arbitral awards are generally final and binding. Judicial review is limited to specific grounds, such as the lack of jurisdiction, irregular proceedings, or violation of public policies. The result is a reduced opportunity for appeal. The ability to challenge an arbitral award is highly restricted, generally focused on procedural aspects.
Potential for increased costs: there’s also the potential for increased costs with international arbitration proceedings, including:
- Arbitrator fees: these fees are usually more expensive than judges
- Legal fees: complex international disputes often require specialized legal counsel, leading to higher legal fees compared to domestic litigation.
- Administrative costs: arbitration institutions charge fees for administering the process, unlike typically subsidized court proceedings, adding to the procedure’s overall expense.
It’s important to understand that these limitations may not apply to every case, they vary as compared to different jurisdictions which may have common traits with arbitration. The specific circumstances of a dispute determine whether arbitration or litigation is the best option.
However, as noted above, because of the extensive application of the New York Convention and the streamlined enforcement process that avoids various typical domestic procedural and substantive challenges, even where there may be such initial arbitration costs, it is more likely than not that in cross-border enforcement, arbitration proceedings provide for an overall total reduction in costs, increased efficiency, certainty and lowered risks.
Conclusion
The advantages of arbitration over litigation are clear. For this reason, international arbitration has rapidly become the preferred method of resolving disputes across international borders considering the speed of the process, confidentiality, expertise of arbitrators, cross-border enforceability, low costs, and flexibility, combined with a neutral forum and party autonomy.
While litigation may still be the best choice in certain domestic cases, arbitration is increasingly seen as an attractive option for many businesses particularly in cross-border disputes.
Companies can select the most appropriate dispute resolution mechanism by understanding the benefits of arbitration while taking the circumstances of a dispute into account.
Stay Updated
FAQ: The Advantages of Arbitration Over Litigation
Is arbitration more cost-effective than litigation?
Yes, arbitration tends to be less expensive than litigation due to its faster process, reduced procedural formalities, and limited opportunity for appeals, which helps avoid prolonged legal battles.
How does confidentiality in arbitration benefit businesses?
Unlike litigation, which is usually public, arbitration is confidential. This allows businesses to resolve disputes without exposing sensitive information to the public or competitors, protecting trade secrets and reputation.
Does arbitration allow for more control over the process?
Yes, parties in arbitration have greater control over the process, such as selecting the arbitrators, choosing the venue, and agreeing on procedural rules. This flexibility can lead to a more tailored and efficient resolution.
Is arbitration quicker than litigation?
Generally, yes. Arbitration proceedings are often faster than litigation because they avoid the delays of the court system and offer more streamlined procedures, leading to quicker resolutions.
