We often see commercial agreements with a dispute resolution clause that requires the parties to attend mediation to resolve a dispute and, in the event that mediation fails, directs that the dispute proceed to arbitration – as opposed to Court.
Every agreement should be considered on its merits in deciding whether to include an arbitration clause as an agreed dispute resolution mechanism.
This article explores both the benefits and pitfalls of commercial arbitration between Australian parties. Different considerations apply for international arbitration which is common in the construction, mining and transportation industries and this article does not apply to that subject matter.
Arbitration: What is it?
Arbitration is a process in which the determination of a dispute is heard by a person or panel chosen by and agreed upon by the parties themselves, or appointed pursuant to statute.
Commercial arbitration is governed by state-enacted legislation, but is broadly the same Australia wide. In New South Wales, it is governed by the Commercial Arbitration Act 2010 (NSW) (the Act) whose stated objective is "to facilitate the fair and final resolution of commercial disputes by impartial arbitral tribunals without unnecessary delay or expense": section 1C of the Act.
Only parties to a contract containing an arbitration clause are bound to a requirement to attend arbitration. Participation must otherwise be consensual and must be agreed to in writing by way of an arbitration agreement between the parties (which may be formal or informal in nature). Arbitration is therefore contractual in nature, a potential problem we explore below.
Benefits of Arbitration
The benefits of arbitration include:
- Privacy and Confidentiality –
Arbitration proceedings remain unknown except to the parties
themselves. It is confidential, away from the potential for
publicity in an open court. No documents are filed at a court
registry. This is particularly so for private companies, with no
obligation to comply with stock exchange material disclosure rules.
Less privacy is obviously afforded to a public company, with its
material disclosure obligations.
This privacy extends to the initial stages and conduct of proceedings and to any award or determination and the reasons for decision given by the arbitral tribunal. The outcome of the arbitration and the details of any award, if it is paid according to the terms of the arbitration decision, is not published or made available to credit reporting agencies.
Of course, this privacy only remains in place if enforcement of the award is not required, or an appeal (if a right exists) is not filed in the Supreme Court.
- Ability to "forum shop"
– In the court system, the presiding judge hearing the case
is sometimes not known until a few weeks or days before a hearing.
The parties have no ability to choose a presiding officer. An
arbitrator/arbitral panel, however, is usually determined by the
parties themselves with protections afforded them by legislation.
For certain matters, the parties may agree to appoint an arbitrator
who may have specific technical knowledge or practical experience
concerning the subject matter of the arbitration, which may
expedite the hearing process and focus on the key technical issues
impacting on the case.
- The availability of appeal rights can be somewhat
controlled – This is both a benefit and a
downside to arbitration. In line with the arbitration regime that
commenced in 2010, a right to appeal must be agreed between the
parties: s34A(1) of the Act. This has the benefit in most cases, of
bringing a greater degree of certainty and finality to the
arbitration. Of course, there is a risk in agreeing to a "no
appeal regime" – if something occurs that does not
assist your client, then you are stuck. Clearly a case of "you
make the bed you lie in".
- Speed of Determination – Depending on the complexity of the proceedings and the efficiency of the arbitrator, an arbitration can be quicker than court proceedings, particularly if the arbitration covers discrete points and specific questions for determination. This is partly due to the fact that the parties are not restricted by the Court's availability to hear the matter.
Downsides of Arbitration
There are downsides to arbitration which are outlined below:
- Cost – Arbitrations can be far
more costly than court proceedings. In addition to each side's
legal fees, which would be about the same in a court, arbitrators
charge hourly and daily rates for work they do. This includes
attending directions hearings, dealing with interlocutory issues
such as timetable slippages, applications for special orders and
presiding at the final trial. Their time also includes preparation
for those hearings involving corresponding with the parties,
reading the pleadings and evidence filed. Suitable venues have to
be found to hold those directions hearings. These may need to be
Significant costs are also likely to be incurred by the arbitrator writing the reasons for decision when determining the arbitration and handing down the "award". These costs must be factored into commercial considerations when strategising your case.
Court filing and hearing fees, of course, include all this. Transcript fees are also higher than in court proceedings as the transcription companies to have to set up audio at the arbitration venue.
If you are a defendant, you will be required to pay a share of the hearing fees, whereas in court the plaintiff is initially responsible for those costs.
- Not all disputes are suited to
arbitration – There are some disputes that
simply do not lend themselves to arbitration. These include:
- Disputes involving a determination as to who the
true parties to a contract are. This is due to the
contractual nature of being bound to an arbitration. For instance,
if you are attempting to enforce a contract against an individual,
but the individual refuses to consent to arbitration arguing that
the real party is the company of which the individual is a
director, a preliminary question will likely arise as to who the
real contracting party is. In the absence of agreement, this may
need to be dealt with and determined by a court;
- Disputes not involving a contract, or are a hybrid
claim involving another area of law – This
includes, for instance, a trade practices dispute where there is a
possibility of joining a director personally for aiding and
abetting a contravention of the Australian Consumer Law. In that
situation, although the company that signed the contract would be
contractually bound to arbitration, if you wished to join the
director personally, they would have to consent to being in the
arbitration, which is unlikely to happen.
- Smaller matters – As a by-product of the cost factor, arbitration is not suited for matters concerning relatively small amounts of money. Where the threshold lies, differs in each case depending on the complexity of the matter, however, it is safe to say that matters that would ordinarily be litigated in the Local Court (less than $100,000) are not generally suited to arbitration.
- Disputes involving a determination as to who the true parties to a contract are. This is due to the contractual nature of being bound to an arbitration. For instance, if you are attempting to enforce a contract against an individual, but the individual refuses to consent to arbitration arguing that the real party is the company of which the individual is a director, a preliminary question will likely arise as to who the real contracting party is. In the absence of agreement, this may need to be dealt with and determined by a court;
- Depending on the arbitrator, procedural timetables
may not be as strictly enforced – Courts are
presided over by judges and registrars who usually manage the court
lists with a degree of firmness and can apply costs penalties and
other orders to encourage compliance with timetables. Arbitrators
can, in our experience, be hesitant to enforce compliance with
timetables, with the result that costs often escalate due to
Other factors to consider
Other factors to note in relation to commercial arbitrations include:
- Arbitrators are not bound by the rules of
evidence – this can be a benefit, particularly
if the evidentiary aspect of the case is not particularly strong,
or can only be strengthened by hearsay, or other normally
inadmissible evidence. Often, submissions will be made as to the
weight that can be given to that evidence, but arbitrator(s) will
be required to at least deal and engage with that evidence.
- Costs are still able to be awarded – Although the rules governing costs orders differ slightly between courts, unless the parties agree otherwise, arbitral tribunals are likely to exercise a discretion in respect of costs when making their award and follow the court protocol in respect of costs orders. It should not be assumed that arbitration means less costs pressure.
Treating an arbitration clause in a commercial agreement as an innocuous boilerplate clause is dangerous and can have far-reaching effects in the event of a dispute. Before entering into an agreement with a proposed arbitration clause in it, it would be wise to take advice as to whether such a clause is appropriate for the contract being entered into. In many instances, it may not be the preferred option.
Surry Partners Lawyers has acted for clients in several domestic arbitrations and can act for parties in or about to conduct arbitration proceedings. It is also able to advise on whether an arbitration clause should be included in a contract and, if so, the form it should take.
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.