Clients often ask why, in some commercial contracts, their lawyers recommend that disputes are handled through the courts but, in others, they recommend arbitration. Sometimes it comes down to a question of judgement, but there are factors which should weigh more heavily in favour of one choice rather than the other.
Large companies like the idea that arbitration proceedings can be kept confidential, unlike court proceedings, which are typically subject to open reporting. Then again, proceedings involving smaller companies typically do not result in any publicity unless they raise an important point of law, and so, for smaller companies, the confidentiality argument may not seem to weigh in the balance one way or the other. Proceedings tend to conclude more quickly at arbitration than through the courts... but then, if you are the party being sued, that may not feel like any sort of an advantage!
The most important reason (typically) for a smaller business to consider an arbitration clause in their contract is if they are contracting with a party in a different jurisdiction from the one in which they are established. This is because of a rather useful international convention called the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "Convention").
Originally signed in 1958, most of the major trading nations of the world are now party to the Convention, and (other things being equal and a fair wind) it ensures the recognition and enforcement of foreign arbitral awards in any Convention country, pretty much as though that foreign arbitration award had been obtained by way of a domestic court order.
Where there is a bilateral treaty on the mutual recognition of court awards between Country A and Country B, it should (in theory) be as easy to enforce, in Country B, a court order obtained in Country A as it is to enforce an arbitral award between Convention countries, but I have to say that the practice can be rather different from the theory. I have been involved in some absolute horror stories over the years, attempting to enforce a UK court judgment in another apparently "friendly" jurisdiction, with the court in the friendly jurisdiction wanting to re-hear the entire case before they will allow their nationals to be subject to a substantial award of damages. At this point, arbitration starts to look like real value for money vs running a litigation in one country and then effectively running that litigation all over again somewhere else.
Another issue to be aware of is that, notwithstanding language which provides that the laws of Country A should be applied to a particular contract, if that contract does not also provide that the parties agree to submit all disputes (whether contractual or non-contractual) to the courts of Country A, it may be open to the counterparty's lawyers to argue that the courts of Country A have no jurisdiction in the relevant case, or that the respondent should be allowed to "play at home" in Country B. If there is no factual nexus connecting the dispute to Country A, the courts of Country A may well refuse jurisdiction, but the courts of Country B may well refuse to apply the laws of Country A to the referred case, notwithstanding the terms of the original contract. It is always possible to appeal court decisions refusing jurisdiction or disapplying particular contractual provisions, but not all clients have the appetite or the funding to participate in the dark underworld of procedural skirmishing, particularly when it gets them no closer to making a financial recovery from the other party.
These kinds of jurisdictional problems do not arise where there is a well-drafted arbitration clause... but let's be clear that a poorly drafted arbitration clause may be no more helpful than any other poorly drafted jurisdictional clause. In addition to specifying the governing law of the contract, a well-drafted arbitration clause should specify: (a) the rules which apply to the arbitration; (b) the geographical location where the arbitration should take place; (c) the number of arbitrators; (d) any particular skill, qualification or level of experience required by the presiding arbitrator; (e) the language of the arbitration; and (f) the courts which will have jurisdiction in the event of any matter outside the remit of the arbitration.
Now, even where arbitration seems as though it might be the best choice for a particular contract, I would still recommend reserving the right for the claiming party to elect whether a particular case should proceed via the courts or via arbitration. Simple debt recovery matters may be quicker and cheaper to resolve through the courts, even taking into account cross-border enforcement issues. Other matters may just be beyond the scope of arbitration, such as those involving the winding up of a counterparty. The relevant language should always ideally remove from the other party the right to challenge the selection of the courts vs arbitration made by the claiming party.
If you would like some guidance on the appropriate jurisdictional language for your international contracts, or advice on the arbitration vs courts issue more generally, please contact me at Katherine@mirkwoodevansvincent.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
