The high cost of arbitration is often cited as one of its drawbacks. This is clearly the case when compared with the cost of litigation, where the emoluments of the adjudicator (Judge) and the costs of the infrastructure (court rooms) and the administration (registry and support staff) are largely borne by the state. Whether the expensive nature of arbitration is a good or bad thing depends on one's perspective.
In jurisdictions plagued by frivolous litigations that frustrate the legitimate expectations of commercial parties, the relatively higher cost of arbitration, vis-à-vis litigation appears to be a reasonable quid pro quo.
A litigant who is party to an arbitration agreement is less likely to pursue a frivolous or speculative claim, when confronted with the reality of the likely costs involved. Also, because some of the costs associated with arbitration are, generally speaking, ad valorem, rising or falling with the quantum of the claim; a litigant who is party to an arbitration agreement is more likely to moderate the claim to reflect the actual sums that can realistically be recovered as against the speculative and unrealistic claims that are often made in litigation.
As most arbitrators engaged in ad hoc arbitration would confirm, no matter how bitter the dispute between parties, their interests always seem to converge at that point in the preliminary meeting where the costs of the arbitration are to be discussed. Indeed, many seemingly intractable disputes have become susceptible to settlement at that point when the cost of paying to have the dispute resolved dawns on the parties.
The relatively high cost of arbitration can potentially frustrate deserving litigants who enter into arbitration agreements without giving due consideration to the costs involved. A litigant who is financially challenged can find that the right to have a dispute arbitrated can be frustrated by the inability to fund the arbitration. Even where a struggling claimant is able to fund its share of the costs of the arbitration, such disputes can be frustrated by a respondent who refuses to pay its own share of the arbitration costs. In such situations, most arbitral regimes provide for the claimant to pay the entire costs of the arbitration and seek recovery of the costs as a part of its claim. The inability to do this will often frustrate the arbitration.
The solution to this is for parties entering into commercial agreements and their advisers to be circumspect in deciding whether to enter into arbitration agreements and, what type of arbitration agreements to enter into. Arbitration agreements are amenable to a broad degree of flexibility and can be tailored to fit the circumstances of the parties and the potential disputes that may arise from their commercial engagements. It would be ill-advised, for example, to insert an arbitration clause requiring ICC arbitration before a panel of three arbitrators into a tenancy agreement in which the rent reserved is $50,000 per annum!
Once the parties take a balanced and realistic view of the pros and cons of the costs of arbitration and ensure that they have the right horse for the right cause, the relatively higher cost should become a non-issue. The efficiency and flexibility inherent in arbitration will, more often than not, justify the added cost.
The real tragedy occurs however when, despite weighing the pros and cons and investing the necessary resources into meeting the costs of arbitral proceedings, a successful party gets stuck in the court system due to difficulties with enforcement. Many horror stories abound, but the locus classicus is probably still the IPCO v NNPC saga.1
This is the greatest challenge confronting arbitration as a means of dispute resolution and members of the arbitral community must pull out all the stops to ensure that the courts recognize this. Arbitration is meant to be an alternative to litigation, not, as is often the case, a prelude to extensive, expensive and time - consuming litigation that defeats the purpose of resorting to arbitration in the first place.
There should be a concerted attempt by the arbitral community to ensure that when arbitration matters come before the courts in any jurisdiction, as they inevitably must, they are treated with particular and especial dispatch. This is in recognition of the fact that expedited proceedings are a significant part of the bargain in paying the relatively higher costs of arbitration.
1 https://guardian.ng/features/law/ipco-v-nnpc-saga-and-liability-of-nigerian-legal-system/ accessed on 26th January 2021.
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