The Arbitration Clause
It amazes me how so many people are unable to distinguish between arbitrations and court litigation. The lack of understanding permeates through almost every level of the commercial sector, including management and boardrooms.
The starting point is to appreciate that the right to arbitrate originates out of a contractual provision, while the right to seek recourse before the courts is basically an inherent right, subject to meeting jurisdictional requirements.
As such, even before we ask the question “Why arbitrate?” it is crucial for negotiating parties to think carefully about how they wish to have disputes resolved in the future. If nothing is said in the contract about arbitration, then there is no right to arbitrate. Disputing parties must go to court to resolve their differences.
Therefore, what you write into the dispute resolution clause is vital, because it is binding on the contractual parties. Many people pay very little attention to the actual wording of the arbitration clause because in many instances it is a boiler plate provision, tucked at the very end of a long contractual document, and many parties simply lose interest after the main terms are agreed. As an example, if the contract provides for London arbitration, under a certain set of arbitration rules, then you are bound by it. If the contracting parties are in Sri Lanka and Malaysia, why should a dispute to referred to London with all the attendant increased costs to the parties? It is therefore important to consider carefully where you want the place of arbitration to be. Equally, what would be the applicable law for the resolution of the merits of the dispute? The provision of the seat of arbitration is also important for the purposes of any application to court in relation to issues that may arise out of the arbitration, including the right, or lack of right to appeal a tribunal’s finding. These matters are best discussed with legal advisors so that an informed decision can be made with respect to the way the arbitration clause should be framed.
Why Arbitrate?
There are four very important reasons why one would choose arbitration over litigation. The first is confidentiality, the second is having a subject-matter expert adjudicate the dispute, the third is informality and the fourth is time efficiency.
Confidentiality
Unlike court litigation, arbitrations are confidential. The parties and the arbitrators are bound by an undertaking of confidentiality and cannot reveal any information about or touching on the arbitration process or proceedings. Contrast this with court litigation, which is a public process that can be attended by newspaper reporters, curious members of the public, friends and foes alike. The evidence adduced in court may touch on many private, confidential or embarrassing points, all of which will be paraded for the amusement of others. Any indiscretions in the evidence, caught out as lies or fabrication will be laid bare for all to read about in the media. However, if parties agree to arbitrate, all the documents, information, evidence, allegations and responses will all remain within the four walls of the hearing room. This is invaluable to commercial men and anybody of reasonably significant standing, so that public opinion is not shaped one way or another.
The award made by the tribunal with full reasoning cannot be disclosed to unrelated parties, and the outcome will remain a private matter between the parties.
Expertise of the Tribunal
Where an arbitration clause calls for a three-man tribunal, it is mostly the case that each party to the dispute will be entitled to nominate one arbitrator and the two party nominated arbitrators will then jointly appoint the third or presiding arbitrator.
Logic dictates that a party would nominate an arbitrator who has the expertise relating to the subject matter of the dispute. For example, in a shipping related dispute, nobody would nominate an arbitrator known for his expertise in taxation or construction matters. The parties would want to nominate somebody intimately familiar with shipping so that he can readily understand the nuances of the business and the complex factual matrix that has led to the dispute. If nothing else, the time taken to understand the issues will be considerably less.
The above is not meant to suggest that judges in the courts are incapable of understanding complex issues in highly specialized areas of the commercial and legal world. However, judges do have to deal with a myriad of types of cases and often do find themselves dealing with cases that involve a subject matter that they are not familiar with. Time will be taken by lawyers and experts to bring the judge up to speed. This is normal, and many judges are more than capable of absorbing complex issues and making sound decisions. The arbitration process, however, seeks to reduce the time needed for familiarization and brings into play an independent person who by sheer repetition is very familiar and the subject matter, and more unlikely to be misled or misinterpret the significance of certain evidence.
Needless to say, independence, integrity, knowledge of the law and arbitration process are all a given and a base requirement. The subject matter expertise is the topping that makes the arbitration process appealing to commercial parties engaged in disputes. The parties and the tribunal “speak the same language” and that is very comforting to the combatants.
Informality
The arbitration process is supposed to be informal but not flippant. Unlike the austere settings of a court room, the arbitration can be held at any venue that parties find suitable. This could be a meeting room in an office or a hotel. Parties, especially those attending a hearing the first time will not feel overwhelmed, and the entire process can be “friendly” and less confrontational. At the end of the day, it is up to the tribunal to set the tone and achieve the balance between a relaxed atmosphere and the seriousness of the business at hand. After all, at the end of the day the award is going to be binding and enforceable, it is not a trivial matter.
Time Efficiency
The Tribunal has total control over the procedural aspects of the reference, and where the timetable for the progress of the matter is concerned, is able to move the matter along efficiently and eliminate delay and dilatory tactics. More importantly the Tribunal is not subject to being plugged into a “registry” system like they do in courts. The Tribunal only has to deal with the availability of the parties concerned and the tribunal, in order to set hearing dates.
Further, given the intimate knowledge that an appropriately constituted tribunal would have over the subject matter of the dispute, the Tribunal would be able to set appropriate and economical timelines for the various stages of the resolution process. This would be in keeping with the overall function of a tribunal to resolve disputes in the most expeditious and economical manner.
Concluding Thoughts
While there may be many other reasons that parties may choose to arbitrate rather than litigate in courts, the above are four reasons that tend to underpin the reasoning process.
A final word on the choice of arbitrators. One really cannot understate the importance of making the right choice of arbitrator. With independence as a given, the chosen arbitrator must clearly understand his role and that his personality will be reflected in the manner the reference proceeds. If he adopts an overly judicial approach which effectively mirrors what happens in the courts, then it defeats the purpose of arbitration and effectively pulls the rug from under the potential benefits of speed and informality.
An arbitrator is appointed (and paid) to fairly adjudicate a dispute in a manner that respects the parties and their representatives with a firm but not over-bearing hand. At the end of the day, the parties, including the losing party, must feel that they have had their day to voice their points, and have been able to say all that they wish to that is material to the dispute. They should then go away from the process with a healthy respect for the outcome.