Arbitration of commercial disputes: key considerations for in-house lawyers

The court is the default forum for determining commercial disputes in England and Wales. However, parties may agree that a binding decision on their disputes is reached through arbitration instead of through the courts.  Should you consider arbitration? What should you do if it is specified in a contract? We will look at what arbitration involves and why it may (or may not) be an appropriate alternative to court proceedings.

What is arbitration – an overview

Arbitration is a process by which a tribunal (either an individual or a panel), acting in a quasi-judicial role, provides a binding decision about a dispute in place of the court. It is a globally recognised process which is supported by national laws and (where necessary) national courts.

The power of the tribunal to determine the dispute arises through the contractual agreement of the parties (referred to as the arbitration agreement), whether at the outset of their contractual relationship or, less commonly, after a dispute has arisen. Typically, arbitration will be specified in the standard terms put forward by a business.

If you have contractually agreed to arbitration, the court will not have jurisdiction to hear the dispute (with limited exceptions). At the same time, because of the contractual nature of an arbitration, the tribunal only has power to hear claims covered by the arbitration agreement. It cannot consolidate claims related to the same facts involving third parties who have not agreed to arbitration.

The tribunal need not be made up of lawyers. It could contain experts in relevant fields, such as accountancy or scientific or technological matters, who are familiar with your industry.

The tribunal’s decision is called an award. Usually, there is no right of appeal.  Awards can be recognised and enforced in courts in most countries around the world (something which cannot be said of a judgment of the national courts). This is one of the reasons why international disputes are often referred to arbitration.

On the other hand, an important limitation with arbitration is the tribunal’s lack of powers compared to the court. For example, unless the parties expressly agree otherwise, the tribunal will have no power to make interim injunctions. Even where it has express powers to make an interim order, it has no power to compel compliance – a breach of its order is not a contempt of court and therefore not subject to sanctions such as fines or imprisonment. It may be necessary to apply to the court in certain circumstances for an injunction such as where goods will need to be preserved pending the decision in the arbitration.

A key feature of arbitrations is that they are private and confidential, where court proceedings are a matter of public record, with the public entitled to attend hearings and access documents filed at court.

Arbitration should not be confused with other types of alternative dispute resolution, such as mediation, which are geared towards helping the parties reach an agreement, but which cannot impose a decision. Frequently, this is a distinction which we find clients have not appreciated when signing up to standard terms.

Arbitrations can generally be divided into two types, those which involve specific arbitration institutions and those which do not (often called ad-hoc arbitrations).

Institutional arbitration

Arbitral institutions such as the London Court of International Arbitration (LCIA) or International Court of Arbitration of the International Chamber of Commerce (ICC) have their own detailed set of procedural rules. These institutes are frequently specified in arbitration clauses in high value contracts, particularly those with an international element; they could be regarded as equivalent to the High Court in England. A dispute heard under the rules of these institutions could be procedurally very similar to a claim in court, and just as costly.

If you considering agreeing to arbitration by an arbitral institute, we recommend reviewing the rules beforehand to get an understanding of what the process will involve.

The current LCIA rules (effective from October 2020) are available here.

The current ICC rules (effective from 1 January 2021) are available here.

Although the rules of these arbitral institutions may be very similar to those of the court in England and Wales, there can be some differences which parties used to litigating in the courts may find unusual. For example, anyone who has litigated a case in the courts in England and Wales will be familiar with the disclosure process, during which parties are generally obliged to disclose relevant documents in their control including those which are adverse to their case.

Under the LCIA, however, documents are produced in response to specific requests by the other party, which the LCIA rules upon if there are any objections.  This means that an adverse document may not need to be mentioned or handed over in the LCIA if it is not requested, where there may be a duty to hand it over in court proceedings.

It is always worth considering whether an arbitration intuition is appropriate based on the size and complexity of the transaction.  If you are entering into a high-value transaction where the parties are negotiating a detailed contract, you will be able to take a commercial decision as to whether to agree to an arbitral intuition of this nature or negotiate the point. On the other hand, care should be taken when dealing on standard terms, particularly those which may apply to low value transactions.  It would not generally be appropriate, for example, to be subject to mandatory arbitration in the LCIA for a small claims value dispute (less than £10,000) between two parties based in England and Wales.

Specific sectors may also have their own arbitral rules. For example, many NHS contracts specify arbitration for disputes under a bespoke arbitration process. Arbitration is particularly common in the construction industry.

There may be limited or no scope to negotiate terms in these sectors, so it is all the more important to understand what the arbitration process will involve. It is, generally speaking, fairly easy to access relevant rules using a quick web search but may be necessary to contact any specified instruction directly to ask for a copy of its rules as part of your due diligence process.

Ad-hoc institutions

The arbitration agreement may specify only basic information such as the location (seat) of the arbitration, the number of arbitrators and how they are to be appointed. The parties will have a lot of freedom to agree the process because they will not be subject to a complex set of rules, so could choose a simplified, quicker and cheaper process.

However, this can bring with it a greater level of uncertainty about the process and outcome, particularly if one party is not being cooperative.

Often the parties may struggle to agree an arbitrator. In some cases, the arbitration agreement may provide that, in default of agreement, an arbitrator be nominated by an institution such as the Institute of Chartered Accountants in England and Wales. However, without such a provision, it may be necessary to make a statutory application to the court to appoint an arbitrator. This would involve time and costs before the arbitration can even commence, and subject to the value of the claim, may make it commercially unattractive to pursue the dispute.

Even when the arbitration proceeds, the parties may have very different ideas of what the procedure should be. In the absence of agreement, the tribunal will make the decision on procedural steps. There is no guarantee that any given tribunal would make what you would regard as the ‘right’ decision, and they would not have the starting point of standard directions which the court would use as a starting point.

For example, the tribunal may specify a complex procedure which would generate costs which are disproportionate to the matter in dispute. On the other hand, it may favour a quick and simple process which focuses on getting a decision as soon as possible, limiting or even dispending with production of documents, limiting witnesses and oral evidence or refusing to accept expert evidence, whereas you may consider your case would be strongest where there is a robust and detailed examination of evidence.

Ultimately, where there are two parties who are willing to cooperate and agree a proportionate procedure, an ad-hoc arbitration may work well. However, it carries with it a significant risk where the parties are not cooperative, or the Tribunal does not adopt a sensible procedure. The process could end up being dragged out and costing more than a dispute in the court.

Is arbitration right for my dispute?

The court remains the most common forum for determining commercial disputes.  It has a well-known set of rules and an expert judiciary used to appointing expert witnesses to give evidence on technical matters. It has powers which go beyond those of a tribunal (such as making urgent, enforceable injunction orders) and its decisions can be appealed where appropriate. For most commercial disputes, the courts will be an appropriate forum to decide the case. In addition, many lawyers will not have any experience in dealing with arbitrations.

However, there may be some situations where arbitration could be a better fit. One of the most common is where the parties are based in different countries and they will know that the arbitration award will be recognised and enforced in different jurisdictions (which may not be the case with a court judgment).

Where there is a high-value transaction with an international element, it is definitely sensible to consider an institutional arbitration such as the LCIA or ICC. This is certainly likely to be preferable for UK businesses to an alternative of taking part in proceedings in the courts of another jurisdiction. It would take away issues which frequently arise in cross-border disputes, such as which country’s court should deal with the case and whether judgments will be enforceable in the jurisdiction of the other party (a greater concern for dealing with EU member states following Brexit).

For disputes which do not have an international element, institutional arbitration such as the LCIA or ICC may not have any particular advantages over the court, save perhaps that the confidential nature of arbitration proceedings may be appealing for your business or, at least, for certain transactions.

As above, in some sectors you may not have any real choice but to arbitrate. It is still sensible, however, to understand what that would involve before the event.

Ad-hoc arbitration can also offer a flexibility which the court cannot: you may decide that you would prefer a simpler format to give a quicker and cheaper (but more ‘rough and ready’) decision. You may also prefer an expert in your field to decide your claim. However, as noted above, this would work best with two co-operating parties (something very difficult to predict in advance). In the worst- case scenario, you may need to apply to the court before the arbitration can even commence, and the process could be slower and costlier that it would have been under the court.

You should always think carefully before agreeing to enter into any arbitration agreement. I would generally recommend that the court remains the default forum for determining disputes unless you have a good reason to opt for arbitration. If arbitration is non-negotiable, you should ensure you understand what it would entail so that this can be factored into the commercial decision-making process.