C. Advantages and Disadvantages of Arbitration

Until today, the enforceability of foreign arbitral awards is seen as one of the most crucial advantages of arbitration over state court litigation in any international context. Other features of arbitration, such as the confidentiality of the proceedings or the efficiency of time and costs, are often named advantages of arbitration but remain controversial among participants and commentators. In contrast to that, the flexibility provided by arbitration, the neutrality of the forum and the enforceability of the award are normally perceived as clear advantages of arbitration. The lack of possibility to appeal an award, on the other hand, is often seen as a disadvantage of arbitration proceedings.

 

I.                  Flexibility

As described before, party autonomy allows the parties to determine the composition of the arbitral tribunal, the law applicable to the arbitral procedure and the substance of the dispute, and whether an arbitral institution administers their proceedings. Accordingly, the flexibility offered by arbitration is often seen as enabling the parties to tailor their proceedings according to their own needs.

This flexibility of the parties can be a great advantage but it also entails its risks. For example, party agreements unfortunately often leave room to different interpretations and misunderstandings and therefore increase the risk for dilatory behavior. In particular tailoring one’s own set of procedural rules requires a lot of foresight, experience and effort to provide the ideal solution to any potential dispute between the parties. Likewise, the freedom enjoyed by parties to an ad hoc arbitration is often outweighed in practice by the experience and convenience of having an administering body of an arbitral institution overseeing the procedure. Moreover, the appointment of a party-chosen arbitrator may backfire if the arbitrator is less expert in his field than expected by the parties or an export in his field but inexperienced in arbitration.

 

II.               Neutrality of the Forum

If parties to a contract come from different jurisdictions, they often fear that a judgment before the foreign state court of the country of seat of the other party could be biased or prejudiced. Since in international commercial arbitration the parties can select the seat of their arbitration and thereby determine the state courts potentially involved in their arbitral proceeding,[1] many parties in an international context opt for arbitration because of the option to choose a seat of the arbitration located in a country unrelated to either of the parties.

 

III.            Enforceability

As has been hinted at before, another clear advantage of arbitration over litigation is the enhanced possibility to have a foreign arbitral award enforced. At present, arbitral awards are thanks to the adoption of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards by more than 150 countries enforceable at a global level. According to Art. III New York Convention, „each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles.” It continues to read that the recognition and enforcement of foreign arbitral awards shall not be threatened by more severe requirements as to conditions, fees or charges when compared to domestic arbitral awards.

When it comes to state court proceedings, there is no comparable international agreement guaranteeing the enforceability of a state court judgment in a foreign country. The judgment of a state court must be recognized either on the grounds of a bilateral or multilateral treaty or without an express international agreement. Consequently, the chances to have a court judgment enforced in a foreign country are by far lower than to have a foreign arbitral award enforced.


IV.            Confidentiality

The confidentiality immanent to most arbitration proceedings – be it by means of an express or implied party agreement or by the recognition as a principle inherent to any arbitration proceedings (see above) – can be a valuable instrument of protection of know how, trade secrets and the reputation of the parties. While it is in the context of investor-state arbitration particularly criticized for a lack of transparency, it is more often criticized in the context of international commercial arbitration for blocking the development of international commercial arbitration law.


V.               No Level of Appeal

The lack of an appellate level in international commercial arbitration is often considered a disadvantage of arbitration, at least from the perspective of the losing party. The chances for setting aside an award or having its enforcement refused are narrow and hence a final award most of the times remains binding on the parties; sometimes even if it is based on an error of law or on a finding of facts that is not supported by the records. Yet, also the lack of appeal may benefit the parties: Like any other proceeding, appellate proceedings can quickly become costly and time-consuming. Hence, the lack of an appellate level often saves the parties time and costs.


VI.            Time

At least some arbitral institutions and commentators are convinced that international commercial arbitration is more time efficient than state court litigation. Nonetheless, a PWC survey from 2013 found out that a significant percentage of companies considering to use arbitration as an instrument of dispute resolution expressed concerns about delays in arbitration proceedings, often linked to a lack of availability of arbitrators.[2] Due to the confidentiality of most arbitrations, it is hard to tell the average time of international commercial arbitration proceedings at a global and representative level. Yet, a survey conducted in 2011 by the Centre for International Arbitration suggests that the average time of arbitration proceedings takes about 17 - 20 months.[3]

Up to a certain level, most arbitral institutions leave it to the discretion of the parties to influence the duration of their proceedings. According to many rules, the parties can agree to shorten their proceedings by agreeing on documents-only arbitration (see for example Art. 19.1 LCIA Arbitration Rules 2014 or Art. 21.1 SIAC Arbitration Rules 2010), shortened time limits (see for example Art. 38 of the ICC Rules of Arbitration 2012), or by agreeing on a procedure in which witness and experts statements can only be submitted in writing (no oral testimony, see for example Art. 28.3 of the Arbitration Rules 2010 of the Arbitration Institute of the Stockholm Chamber of Commerce). Many institutions also offer to support their clients’ wish for a shortened procedure by offering expedited proceedings, which for example stipulate that the arbitration proceedings shall last no longer than nine months (in cases of three arbitrators) or six months (in cases of a sole arbitrator) (see for example Section 1 1.2 of the DIS-Supplementary Rules for Expedited Proceedings 08). Yet, even in cases where the rules of the arbitral institution do not expressly provide for such time saving provisions, parties can often derogate from the provisions contained in the institutional rules unless they are of mandatory nature. As a more general matter, arbitration may be shorter than state court litigation due to its lack of an appellate level.


VII.         Costs

Although it is sometimes said that arbitration is more cost efficient than litigation, it strikes that most arbitral institutions refrain from claiming that arbitration is cheaper than litigation at a general level. Instead, many of them highlight the predictability of the costs (so do for example SIAC, SCC and CEPANI on their homepages). Others, like the ICC, point out that arbitration can be faster and cheaper than litigation if the parties agree on appropriate procedures.[4]

Yet, according to a PWC survey from 2013, a significant percentage of companies is concerned about the costs in arbitration proceedings.[5] Corresponding to that, some surveys suggest that arbitration was more expensive than litigation.[6] Other articles, on the other hand, reported that according to the experiences made by their authors, arbitration can in general be cheaper than litigation.[7]

Concluding on the issue of costs, the only general rule most probably is that like most of the times when a lawyer is asked a question, the only true answer is “it depends”.



[1] The term “seat of the arbitration” refers to the place which determines the legal jurisdiction to which the arbitration is tied. It is a purely legal term and needs to be distinguished from the venue of the arbitration which refers to the actual place where meetings between the arbitral tribunal and the parties take place (e.g. for hearings, the taking of evidence, etc.). In practice, however, the venue and the seat of the arbitration are often congruent. The law of the country in which the seat of the arbitration is located is decisive for a number of factors, such as which national courts may intervene during the arbitration to what extent, which law is applicable to the arbitration proceedings and under what conditions an award may be set aside or refused enforcement.

[2] For more details see http://www.pwc.com/gx/en/arbitration-dispute-resolution/assets/pwc-international-arbitration-study.pdf (last checked on August 1, 2015).

[3] CIArb Costs of International Arbitration Survey 2011 p. 12 (available online).

[4] See http://www.iccwbo.org/Products-and-Services/Arbitration-and-ADR/Arbitration/Introduction-to-ICC-Arbitration/Ten-good-reasons-to-choose-ICC-arbitration/ (last checked on August 1, 2015).

[5] For more details see http://www.pwc.com/gx/en/arbitration-dispute-resolution/assets/pwc-international-arbitration-study.pdf (last checked on August 1, 2015).

[6] See for instance the small scale survey commented on in 2012 by Dabdoub and Cox on the website of the magazine Inside Counsel at http://www.insidecounsel.com/2012/12/06/which-costs-less-arbitration-or-litigation (last checked on August 1, 2015).

[7] See for example with regard to securities disputes the article published by Libner on the Forbes website in 2009 at http://www.forbes.com/2009/07/14/lipner-arbitration-litigation-intelligent-investing-cost.html (last checked on August 1, 2015).

Last modified: Sunday, 30 August 2015, 9:37 PM