The use of commercial arbitration by Australian companies is increasing, especially in the context of cross-border business.
In this article, we briefly introduce commercial arbitration, explain the pros and cons of resolving disputes through international commercial arbitration (as opposed to court proceedings), and summarise the circumstances in which Australian parties would be better off choosing to arbitrate their cross-border dispute.
What is commercial arbitration?
Commercial arbitration is a method of dispute resolution where the parties agree, usually in an arbitration clause as part of the main transaction agreement or in a separate arbitration agreement, to have an independent and impartial single arbitrator or arbitral tribunal (usually made up of three arbitrators) determine their disputes. The single arbitrator or arbitral tribunal makes a final determination that is binding on the parties to the dispute.
Frequently, the arbitrators are legal or technical experts (or both) of the parties' own choosing and use procedures that the parties can select and influence according to applicable laws.
Commercial arbitrations can be separated into:
- "domestic commercial arbitrations", which are governed in Australia by the Uniform Commercial Arbitration Acts
- "international commercial arbitrations", which refer to the resolution of disputes relating to cross-border transactions and are governed in Australia by the International Arbitration Act 1974 (Cth).
International commercial arbitration involves parties from different countries agreeing to submit their disputes to arbitration without recourse to the courts of a particular country. The resulting arbitral award is final and binding on the parties, and enforceable across international borders.
International commercial arbitration can be distinguished from investor-state arbitration because investor-state arbitration involves investors (including commercial entities) taking action against a state (country) on the basis of bilateral or multilateral treaties or investment protection agreements between states (such as free trade agreements, for example).
What are the pros of choosing arbitration?
Arbitration offers a number of advantages to court litigation. We outline these below.
Enforcing an arbitral award against a foreign party in a foreign jurisdiction through the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) is often much easier than enforcing a court judgment against a foreign party in a foreign jurisdiction.
The New York Convention provides for the recognition and enforcement of foreign arbitral awards in 168 countries. International enforcement of a court judgment, however, is much more difficult.
For a court judgment to be enforced internationally, there must be a mutual recognition agreement between the jurisdiction in which the decision was made and the jurisdiction in which enforcement is sought. Furthermore, in international litigation, parties must generally resolve their dispute in the national courts of one of the parties. If the unsuccessful party has no assets in that country, the successful party might need to enforce the judgment in another country. This will depend on the enforcement provisions in that country and can be very costly and time-consuming.
Choice of decision-maker
The ability for the parties to nominate the arbitrators to determine the dispute enables the parties to appoint arbitrators who may be leading world experts in the field relating to the dispute. The parties can choose an arbitrator or arbitrators with appropriate qualifications and experience.
For instance, some disputes might be well suited to resolution by a legal expert, while others might be highly technical or require expert evidence concerning questions best left to engineers, quantity surveyors, or builders. On the other hand, in a court case, the parties have little control over who will be the judge appointed to determine their dispute.
Most jurisdictions acknowledge that arbitration proceedings and decisions are confidential. For example, sections 23C and 23G of the International Arbitration Act in Australia provide a right of confidentiality in international arbitrations seated in Australia, provided parties opt into the provision. Court proceedings, on the other hand, are usually public. This means that there is less publicity over an arbitration dispute and its outcome, and less risk of disclosing commercially sensitive information.
In international arbitrations, both the arbitrator or arbitrators' identity and venue can be neutral from the parties' location. In international litigation, the judge is likely to have the same nationality as one of the parties, whereas in international arbitration, sole arbitrators will almost invariably be from a different nation to the parties. Arbitration also avoids one of the parties having to prosecute their claim through a foreign court system using unfamiliar laws and procedures.
The parties are free to choose where the arbitration takes place and what law and institutional rules will govern the arbitration and procedure. Arbitration also offers greater procedural flexibility than litigation. Parties may agree on time limits, confidentiality, location of oral hearings, the language of documents and hearings, and even whether the tribunal will make a decision according to law or justice and fairness. For example, the parties may agree to conduct the arbitration with a limited time for the presentation of oral evidence, or even with no oral evidence at all.
Arbitration proceedings can be brought on relatively quickly for hearing, subject to the availability of the parties and the arbitrators, particularly if parties elect to fast-track the arbitration by adopting expedited arbitral rules.
What are the cons of choosing arbitration?
The disadvantages of arbitration are set out below.
Limited right of appeal
Court proceedings at first instance might be amenable to one or possibly two levels of appeal. However, arbitration is conclusive and final, and there is usually no provision for appeal of an arbitral award.
The costs of arbitration can, in many instances, be considered disproportionate, especially where the amount in dispute is relatively low. Unlike courts (where governments pay judges' salaries), the parties settle the arbitrators' costs for conducting the arbitration.
Lack of familiarity and historical preference for litigation
Many parties are not familiar with arbitration and are used to dealing with disputes through court-based litigation. This can lead to a natural preference for litigation over arbitration. Also, the confidentiality of arbitration may give rise to doubts on its transparency, consistency and predictability. Arguably, some matters have sufficient public interest that should be not hidden away in a closed arbitration – take, for example, the recent cases dealing with COVID-19 exclusion clauses in insurance policies.
When to choose arbitration?
In practice, it is sensible for the parties to choose to resolve disputes through international commercial arbitration (as opposed to court proceedings) where:
- there is an enforceable arbitration agreement that applies to the relevant dispute – without that, the arbitration cannot be enforced
- the counterparty does not have substantial assets located in the same jurisdiction, and there is a concern about enforcing a local court judgment against the counterparty
- there is a risk of disclosing commercially sensitive information through the dispute resolution process. This can be particularly important in cross-border disputes relating to commercially sensitive information, such as patent rights and other key intellectual property; and/or
- the dispute relates to a complex cross-border transaction (such as a sale and purchase of valuable goods and/or services, or a cross-border joint venture or equity investment).
Our arbitration experts have extensive experience advising on arbitration agreements and resolving complex cross-border disputes through commercial arbitrations in Australia and the Asia-Pacific region.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.