Dispute resolution: weighing up litigation, arbitration and mediation

June 2023  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

June 2023 Issue

Arbitration is an alternative to litigation, whereby the parties can agree to submit their dispute to a private judge or judges – the arbitrator or tribunal. Like litigation, arbitration is an adversarial process, and the tribunal will make a binding decision, which is enforceable by the parties.

The parties to an arbitration are free to select the arbitrators, provided this has been agreed or is permitted by the rules of the relevant arbitral institution. This means the parties can ensure the arbitrator has the relevant expertise to decide the dispute, which is particularly helpful in technical disputes or highly specialised areas. Arbitrators are often lawyers, but they do not have to be, so parties may, for example, elect to appoint an engineer or surveyor.

Arbitration is more flexible than litigation as the process can be tailored to meet the needs of the case and there is more flexibility as regards procedural deadlines. Since the coronavirus (COVID-19) pandemic, there has been an increase in remote and hybrid hearings, which can save significant time and costs. In contrast, some jurisdictions place restrictions on witnesses testifying remotely in court proceedings in another jurisdiction, or on attendees from overseas joining hybrid court hearings by video link.

Arbitration is usually more advantageous in terms of enforcement as most arbitration awards can be enforced in other jurisdictions. The New York Convention is a multilateral treaty, signed by most countries, that obliges each signatory to enforce an arbitration award made in another signatory state as though it were a judgment of the courts of the country where enforcement is sought. In contrast, court judgments are enforceable between states either where there is a bilateral (or multilateral, for example Gulf Cooperation Council (GCC) agreements) treaty or where there is reciprocity.

Confidentiality is another important factor for many parties. Members of the public are allowed to attend court trials and documents filed with the courts are usually publicly accessible. In contrast, arbitrations are typically confidential, save for certain limited exceptions, such as investor-state disputes. Arbitration is therefore likely to be preferable where the dispute involves commercially sensitive information or other issues that the parties do not want to come to light.

Disadvantages of arbitration include the added costs of the arbitrators’ fees and expenses, institutional fees and costs of hiring the hearing venue. It is not necessarily the case, therefore, that arbitration is cheaper than litigation, although that is a common perception. The reality is that arbitration is likely to be cheaper than US court litigation, but may well be more expensive than, say, litigation in the German courts. Arbitration also may or may not be quicker than litigation – the timeframe is generally similar to English litigation, but much quicker than litigation in the Italian courts, for example.

The scope of disclosure is typically more limited than would be the case in litigation in common law jurisdictions, although (unlike in civil law jurisdictions) it is usual to have some disclosure. Disclosure is an obligation on each party to disclose and produce copies of documents in their possession or control that are relevant to the issues in dispute, even if those documents are unfavourable to the disclosing party.

This may or may not be an advantage depending on the nature of the dispute but, generally speaking, the disclosure process adopted in most arbitrations, which is typically governed by the International Bar Association (IBA) Rules, strikes a reasonable balance between the two extremes of full discovery, which is very expensive and time consuming, and no disclosure at all, which may make it difficult for the parties to make their case.

Appeals or challenges to arbitration awards are generally limited to narrow grounds, such as procedural irregularity or fraud. This has the advantage of finality but is disadvantageous for an unsuccessful party wishing to challenge the award.

If parties do decide to submit disputes to arbitration, careful thought should be given to the arbitration agreement. The clause should be widely drafted to avoid lengthy arguments as to whether a particular issue is covered. The clause should be simple but must cover the following key points: the agreement to arbitrate, the type of arbitration, the scope of the agreement to arbitrate, the number of arbitrators and their method of appointment, the seat of the arbitration, language, governing law of the arbitration agreement and confidentiality. The standard arbitration clause of the parties’ chosen arbitral institution (if applicable) will provide a good starting point, but the parties should be prepared to tailor standard clauses to meet their needs.

The role of mediation

Mediation is not a binding form of alternative dispute resolution (ADR). Unlike litigation and arbitration, it is not adversarial. The mediator will try to broker a commercial deal between the parties but cannot impose one on them. Mediation can be used either before or during arbitration or litigation. It is increasingly common for dispute resolution clauses to include escalation provisions requiring the parties to mediate prior to commencing proceedings. Even in the absence of agreement by the parties, many courts require parties to consider ADR and there can be cost consequences if one party unreasonably refuses to mediate.

The mediation process is intended to help the parties evaluate the strengths and weaknesses of their case. A good mediator will encourage the parties to consider potential outcomes, including the best- and worst-case scenarios. This can help shift the parties’ mindset from what is often a sense that they are in the right and have been wronged by their opponent to accepting that there is a range of possible outcomes, not all of which are desirable – all cases carry litigation risk, even those that appear strong on their merits.

Mediation also gives the parties an opportunity to speak face-to-face, on a without prejudice basis, as nothing said at a mediation can be relied upon in proceedings (whether they are ongoing or are yet to commence). Frank conversations between businesspeople can help get to the root of the problem and find a solution, particularly if there is an ongoing relationship between the parties.

The advantage of mediating prior to commencing proceedings is that, if a settlement is reached, the parties will save significant costs, as well as time and resources. The parties may also be more amenable to productive discussions at the pre-action stage. Adverse proceedings, whether litigation or arbitration, usually result in parties becoming deeply entrenched in their positions and, even in commercial disputes, emotions often run high. It can be difficult to negotiate once the relationship has deteriorated.

On the other hand, parties are often not equipped to analyse the strengths and weaknesses of their position and, perhaps more importantly, that of their opponent until later in the proceedings – often after disclosure and production of documents or exchange of factual or expert evidence. Mediation is often attempted after exchange of evidence, when the trial is looming and brief fees are about to fall due. Reality tends to set in at this point and mediation can give the parties a final opportunity to end the dispute on agreed terms. However, there is no guarantee that mediation will succeed, and parties should be careful not to let late-stage mediations interfere with trial or hearing preparation.

There is certainly a time and a place for mediation but treating it as a ‘tick-box’ exercise without meaningful engagement by the parties is likely to result in nothing more than wasted time and costs. In extreme cases mediation can make the position worse if the parties are antagonistic or one party is simply using the process to advance an ulterior agenda. However, if there is a genuine willingness by the parties to attempt to resolve a dispute, mediation can, if deployed at the right time, be an effective way of achieving a mutually acceptable outcome.

 

Deborah Ruff is a partner and Charlotte Stewart-Jones is a senior associate at Pillsbury Winthrop Shaw Pittman LLP. Ms Ruff can be contacted on +44 (0)20 7847 9528 or by email: deborah.ruff@pillsburylaw.com. Ms Stewart-Jones can be contacted on +44 (0)20 7847 9554 or by email: charlotte.stewartjones@pillsburylaw.com.

© Financier Worldwide

BY

Deborah Ruff and Charlotte Stewart-Jones

Pillsbury Winthrop Shaw Pittman LLP

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