When negotiating contracts, often the Governing Law and Jurisdiction clauses are agreed as boilerplate, without significant thought or debate.
However, there are good reasons to stop and think before you agree to arbitrate your disputes, rather than resolve them through a court process.
In this article, we look at the questions to ask before agreeing to arbitration.
Is privacy genuinely helpful in this sector or situation?
Commercial parties often opt for the privacy and confidentiality of arbitration. They do not want the risk of a negative judgment available in the public domain. That is a valid concern, and may be a sufficient reason to agree to arbitration over litigation.
However, there are sometimes good reasons why it may be helpful to have the precedent of a court judgment. For example, parties may want a precedent to:
- Clarify an ambiguous law;
- Establish a new right; or
- Adapt an old law for modern circumstances.
This is particularly pertinent in areas of new technology, which includes: cryptocurrency, digital assets, and AI.
In newer areas of technology, where the law is developing, parties may find it helpful to shape the law through judicial decisions and comment, rather than behind closed doors in arbitration.
Where is the counterparty located?
If the contracting parties are located in different countries, arbitration can be a preferable option for dispute resolution.
Service out of the jurisdiction can be complex
In litigation, the UK party will have to serve the claim outside of the jurisdiction on a party abroad. Depending on where the foreign party is situated, this can be complex. It can involve seeking the permission of the court, translating the documents, legalising and apostilling documents, and direct service by a local agent.
Enforcement considerations
When it comes to enforcement, the winning party will typically pursue the enforcement of a judgment in jurisdictions where the other party has assets. Local laws of that jurisdiction will govern the process, and it could be a lengthy and complicated process.
International arbitration tends to be more favourable for cross-border disputes. Signatories to the New York Convention are bound to recognise and enforce arbitration awards made in other contracting states.
Unlike domestic court judgments, arbitral awards can be enforced in nearly every country of the world.
Do you need particular expertise from the decision maker?
One of the benefits of arbitration is that the parties choose at least one of the arbitrators who decides the dispute. In litigation, the dispute is assigned to a judge and the parties have no say.
That means that in arbitration, parties can choose a decision maker who has particular expertise in their industry. They are more likely to understand the nuances of the dispute, normal industry practices, and the wider context of the sector.
This can be helpful in industries which use a multitude of technical language such as shipping, construction, and financial disputes (among others).
Where will the seat of arbitration be?
If parties are choosing arbitration to resolve their disputes, they must also agree on the seat of the arbitration.
The seat refers to the procedural law which governs the arbitration proceedings. Among other things, the seat of the arbitration determines the extent to which local courts will be able to intervene in the arbitral process and to hear appeals of arbitral awards.
With that in mind, popular seats tend to be those which are known to be within arbitration-friendly jurisdictions, such as London, Paris, or Singapore.
Which arbitration rules will apply?
Each arbitral institution has its own set of rules, which are competent and comprehensive to handle disputes. Popular rules for most disputes include LCIA, ICC and UNCITRAL.
However, certain industries have preferred institutions. For example, shipping disputes are usually referred to the London Maritime Arbitrators Association (LMAA), and disputes relating to international grain trade often prefer the Grain and Feed Trade Association (GAFTA).
Consider consistency with other contracts
In multi-contract arrangements, there is a risk that different tribunals will be appointed to deal with multiple arbitrations which relate to the same set of facts. This can lead to conflicting decisions.
To avoid this risk, the arbitration in each interrelated contract should be the same, and expressly allow for consolidation and joinders.
The dispute resolution clauses should be consistent in all related contracts to minimise the risk of parallel proceedings, which can be expensive, time-consuming, and lead to inconsistent outcomes.
When is arbitration preferable to litigation?
Arbitration is preferable to litigation when parties are located in different countries, and both parties want the dispute to remain as private as possible.
In contrast to litigation, the New York Convention makes it straightforward for parties to enforce an arbitration award in other jurisdictions. Parties may find it more difficult to enforce a decision from a foreign court in another jurisdiction.
