Litigation vs arbitration: what’s the difference?
It’s common knowledge that for commercial disputes which cannot be resolved amicably, the courts are there to assist. Often, an underlying contract will have a ‘jurisdiction’ clause which specifies that a particular country’s courts will be nominated to resolve any and all disputes. The process of resolving disputes through the courts is referred to as ‘litigation’.
But is litigation always available as an option, or must you follow a different process? And at what point do you have a choice?
The short answer is that litigation is not always available, as of right. One of the most common reasons for this is where the underlying contract contains an arbitration clause, stipulating that any/all disputes which arise and cannot be resolved amicably must be referred to arbitration.
The contract negotiation stage is therefore the best (and sometimes the only) opportunity to agree a mechanism for how future disputes are to be resolved.
Arbitration is one of the most widely used alternatives to litigation. It is a common misconception that arbitration is the same as mediation; it is not. Arbitration is an adversarial process which results in a binding ‘award’ – the equivalent of a court judgment (whereas mediation is a negotiation assisted by a nominated 3rd party). Arbitration shares some of the characteristics of litigation, but if you are considering specifying it as a dispute resolution mechanism in your contract, it is important to have a basic awareness of how it differs to litigation, so that an informed choice can be made.
The below offers some key comparisons, which illustrate how the processes differ.
A process by which a dispute is referred to and resolved by a country’s courts (normally by a judge).
An alternative form of dispute resolution, in which a dispute is referred to (usually) one or three independent arbitrators, who determine the dispute.
For any dispute, provided that: (i) it falls within the relevant court’s jurisdiction (having regard to geography, and any choice of courts specified in a contract, for example); and (ii) the parties have not agreed that an alternative form of dispute resolution will apply instead.
Only by agreement of the relevant parties, which is normally by way of an arbitration clause specified in a written contract. Arbitration is contractual in nature.
Normally a single judge. In rarer instances (such as when a judge’s decision is appealed to the Court of Appeal or the Supreme Court, more than one judge can be involved).
The parties have no say in which judges hear the case.
The arbitration clause often specifies the number of arbitrators (one or three), and the institution whose rules will govern the arbitration, including the nomination of arbitrators. Examples of arbitral institutions include the London Court of International Arbitration (LCIA) and the International Chamber of Commerce (ICC).
Parties can sometimes jointly nominate a sole arbitrator, or (where there is a panel of three) each nominate an arbitrator. This can allow for the selection of arbitrators with specific and proven expertise.
In England, litigation proceeds in accordance with strictly applied procedural rules.
In a typical money claim, the procedural rules will require the parties to:
- exchange Statements of Case, which summarise their factual and legal positions
- disclose the documents which they and other parties wish to rely on
- exchange witness statements, summarising the factual evidence on which they rely
- (if necessary), adduce independent 3rd party expert evidence supporting their case
- attend a trial at which the parties’ cases are presented, and witnesses and experts can be questioned, enabling the judge to make findings of fact and form a reasoned judgment by applying the relevant law.
The arbitration clause agreed by the parties typically specifies an institution whose rules will govern the arbitration.
The arbitration procedure is subject to those rules.
The rules tend to be less prescriptive than court procedural rules, allowing the arbitrator (in consultation with the parties) flexibility to tailor the process to the dispute, which is still decided in accordance with the applicable/governing law.
In England, the judge’s powers are derived from legislation and common law. Their judgment and any order made is binding on the parties.
In certain circumstances civil/commercial judges can impose criminal penalties (including imprisonment) on parties found to be in breach of court orders.
In England, an arbitrator’s powers are derived from and limited primarily by contract (the arbitration agreement and applicable institutional rules), as supplemented by the Arbitration Act 1996.
Their formal determination of the dispute – referred to as an ‘award’ – and any resulting order is binding on the parties to the arbitration.
Arbitrators do not have the power to impose criminal sanctions in the event of a breach of an order.
The Civil Division of the Court of Appeal hears appeals from all divisions of the High Court and, in some instances from the County Courts and certain tribunals. If a party wishes to appeal a decision, they must obtain permission. Permission may be granted by the court below, or the Court of Appeal itself. A single judge will often hear a permission to appeal, whereas the appeal itself will sometimes be heard by two or three judges.
An arbitrator’s decision is usually final and can only be set aside for a very limited number of reasons.
This aids the successful party in giving finality, and prevents parties from becoming caught up in lengthy appeals. On the other hand, the unsuccessful party has much more limited options to appeal than in litigation.
The main costs incurred by a party will typically comprise solicitors’ fees, barristers’ fees, and the fees of any expert witnesses who are appointed. A successful party will normally be awarded most but not all of its costs of the litigation. However, the court has wide discretion and can order otherwise.
In addition to the types of costs typically involved in litigation, fees are also payable to the arbitrator(s), and to the arbitral institution (if there is one).
Arbitrators tend to have a broad discretion to make costs awards upon the conclusion of an action (normally based on success/failure), and sometimes at earlier stages.
Save in limited circumstances, the existence of litigation is publicly available information. Court hearings are accessible to the public, again with limited exceptions.
Arbitration proceedings are confidential to the parties and hearings are held in private. This is one of the key advantages for many parties over litigation as often parties wish to keep the details of their dispute private.
The recognition and ability to enforce court judgments in overseas jurisdictions tends to depend on what international reciprocal arrangements / treaties are in place between the two countries, and on the local laws of the country in which recognition/enforcement is sought. Without such arrangements, enforcing a judgment against a defendant in an overseas jurisdiction can be time-consuming and expensive.
Ease of enforcement abroad is a key advantage of arbitration. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides an established enforcement regime for international arbitration awards.
Approximately 170 countries are signatories to the New York Convention, which streamlines the recognition and enforcement of arbitral awards overseas. There are only limited grounds for a signatory state to refuse.
How we can help
If you need guidance on which dispute resolution mechanism might best suit your commercial arrangements, or if you need advice or assistance in relation to disputes involving litigation or arbitration, please do get in touch with our commercial disputes team.