Arbitration is a contract-based form of alternative dispute resolution (ADR) where an independent impartial adjudicator is engaged jointly by disputing parties, who will hear both their arguments and make a decision that ideally resolves the conflict. This decision arrived at is known as an award and it is legally binding.
To begin the arbitration process, an arbitration institute is selected by the parties. Next, there is the choice of a one-arbitrator or a three-arbitrator tribunal. In the case of a one-arbitrator tribunal, the parties jointly select an arbitrator unless they are unable to agree, in which case the arbitrator is selected by the aforementioned institute. In the case of a three-arbitrator tribunal, each party nominates one arbitrator for a total of two with the third arbitrator to be chosen either by the institute or by the two party-nominated arbitrators that have already been selected. The two party-nominated arbitrators must first be confirmed by the institute.
The rules of arbitration can be found in the relevant rules of the various arbitration institutions, such as the International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA). In many respects arbitration may seem similar to a court case, but the fundamental benefits brought by the use of arbitration over traditional court claims, are innumerable.
Arbitration, generally, can be more cost-effective less time-consuming than traditional court proceedings. Both the ICC and LCIA place an emphasis on time and cost efficiency in their rules and guiding principles.
Khizar Arif, a partner, points out "the financial risk of going to court is substantial. Not only can you rack up eye-watering sums in your own legal fees, if you lose the claim, you are also liable for the victor's legal fees as well. Considering both sides usually have similar legal fees, a loss in court can be financially devastating even to the deepest of pockets." Khizar further comments "not only does arbitration involve significantly smaller costs, the default position for arbitration is that each party pays for their own costs regardless of who wins. While this could be seen as a downside for a party who feels very confident in their chances, it limits the amount of financial risk either party has to assume simply to settle their dispute."
It should also be noted that arbitration provides a far greater degree of finality, more so than mediation or negotiation. Mediation or negotiation, whilst valid means of ADR, carry a risk of failure and wasted costs. If the parties are unable to come to an agreement during mediation or negotiation, they face having to start court proceedings and the costs already spent would have been wasted.
An arbitrator will come to a decision in every case. Additionally, the Arbitration Act severely limits the grounds for either party to challenge an arbitration award. The award is agreed beforehand by both parties to be final, which precludes potentially years of legal challenges involving expensive litigation.
Many multi-national firms choose arbitration for their method of resolution for cross-border disputes. Also, arbitration awards are recognised and enforceable in most countries. Most countries' national civil rules are in part based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, which significantly streamlines the process of international enforcement of arbitration awards.
In addition to this, some cross-border litigators find it disadvantageous to pursue a claim against someone in a foreign jurisdiction, believing the other side might have a home-turf advantage as they may have had years of experience litigating in their jurisdiction. Employing a supposedly neutral, impartial arbitrator may be a way to assuage this fear, and there is no lack of internationally-recognised arbitration institutes eager to provide their services. Arbitration also allows for an unmatched level of convenience. Among others, both the ICC and LCIA have recognised remote hearings to be fully admissible in their courts. Parties can save a great deal of time and money resolving a dispute for which they might have originally had to travel internationally.
Lastly, whereas joining additional parties to a court case is an arduous and extensive process, the joiner of a third party into an arbitration is much simpler. Changes in the ICC and LCIA rules also mean that you do not need the other party's approval to join a third party.
Arbitration carries many other benefits, some of which it shares with other methods of ADR. Where dispute resolution is concerned, it is always important to at least consider other options as courts, nowadays, expect disputing parties not to issue court proceedings without first attempting ADR.
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.