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When entering a contract, most parties focus on the terms governing their new relationship. However, parties commonly neglect to consider how they will resolve any disputes that arise during the course of the contract. Whilst you may never have to rely on such provisions, dispute resolution clauses are key to ensuring that you are protected if anything does go wrong. You should consider what type of dispute resolution will be most beneficial for both parties, and draft your contract accordingly. This article will examine the pros and cons of including an arbitration clause in your commercial contract.
What is Arbitration?
Arbitration is a form of alternative dispute resolution. It is a process by which parties who have entered into a dispute meet with an independent arbitrator to present their own sides of the dispute. After a hearing, the arbitrator makes a binding and enforceable determination.
Knowing the difference between the various types of alternative dispute resolution is important. It is important that yu understand the difference between the key alternative dispute resolution processes, arbitration and mediation.
What Does an Arbitration Clause Contain?
An arbitration clause will generally outline:
- what rules the arbitration will be bound by, such as English law;
- the seat (location) of the arbitration;
- the language used during the arbitration proceedings;
- the number of arbitrators that there will be; and
- how the costs of the arbitration will be shared.
If the arbitration is to be carried out in Australia, the Australian Centre for International Commercial Arbitration governs the rules of the arbitration.
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Pros of Arbitration Clause
Efficiency
Litigation can be a lengthy process that may require many years to resolve. Arbitration, on the other hand, is a shorter and more efficient process. Some proceedings are finished in a single day. The ability to appeal a decision is often limited, so parties enter arbitration knowing that the process will be short.
Confidentiality
Court proceedings are commonly open to the public. This means that trade secrets and other commercially sensitive material may be disclosed during the course of proceedings.
In contrast, arbitration is highly confidential and the arbitrators and parties are bound by strict confidentiality rules. This can benefit businesses that do not wish for the details of their dispute to become public.
Binding Decision
Other forms of alternative dispute resolution, such as mediation, do not produce decisions that are binding and enforceable. However, an arbitrator’s decision, in the form of an award, is binding on both parties. If a party does not act upon it, they can be taken to court as a court will ordinarily uphold the decision of an arbitrator.
Expertise
Arbitrators often have expertise in specific areas, which can be helpful for parties wanting to ensure the decision-maker understands their relevant industry. For example, an arbitrator may be an expert in the construction industry or the medical industry.
International Parties
When parties enter a contract across jurisdictions, an arbitration clause is extremely beneficial. Under the New York Convention, an award made through arbitration is enforceable in more than 150 countries. This means that parties from different countries do not need to worry about issues like jurisdiction and enforceability, which may arise if a traditional court judgement is sought.
Flexibility and Informality
Although an arbitration award is enforceable, the process of arbitration may be more flexible than traditional litigation. The rules are typically less onerous in arbitration proceedings compared to the rules of evidence in litigation.
Cons of Arbitration Clause
Cost
Although it is much more efficient than litigation, the costs of arbitration can sometimes be high. The reason for this is that there are various fees involved, including initiation fees and arbitrators fees. Furthermore, parties often retain legal representation during arbitration which can be quite costly. This is something parties should be aware of before initiating the process.
Formality
While the arbitration process is more flexible than litigation, it is still subject to its own set of rules and processes. For example, in mediation, the parties may exercise significant control over the mediation process. In arbitration, there are binding rules and processes that must be followed once the process commences.
Key Takeaways
When drafting a contract, it is essential that parties turn their minds to dispute resolution clauses. There are various options available, with factors such as budget, jurisdiction and a party’s risk aversion playing a part in what type of dispute resolution works for you. You should consider various pros and cons when deciding if you will incorporate an arbitration clause in a commercial agreement.
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Frequently Asked Questions
If you are a party to a contract with an arbitration clause, in practice, either party may obligate the other party to attend. The decision of the arbitrator is also usually binding.
Though not without cost, arbitration is almost always cheaper than court litigation.
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