Arbitration Clauses – A Necessity for Commercial Agreements?

December 12 2022

Blog by Henna Elahi 

Arbitration has been used as an alternative to litigation as a means of resolving commercial disputes for centuries. Henry VIII’s most favoured adviser Thomas Cromwell was famously a champion of arbitration in London’s 16th Century mercantile arena. It most commonly takes place between commercial parties because, unlike Court litigation, all parties must agree to arbitration – it cannot be forced upon anyone. This choice is usually made by way of including an arbitration clause in a commercial agreement.
Today, arbitration clauses are part of the standard wording in the model contracts used in many commercial areas such as construction, energy, international trade and finance. However, in the business world the only constant is change, so there is good reason for anyone engaging in business to keep considering whether or not arbitration is the best option for them. In this blog, we set out the key considerations parties should keep in mind when making this decision.
So, why choose arbitration?

Neutrality - For parties in separate jurisdictions, there can be a real comfort in selecting a neutral forum for disputes to be decided. For example, many parties choose London as their arbitral seat which has long been considered a leading seat for arbitration. If a party does not feel that the arbitration has been properly conducted, this means they can appeal to the High Court in London, which is the world’s leading forum for such appeals.

Confidentiality - The parties to arbitration are subject to duties of confidentiality, and arbitration hearings are usually held in private. In contrast to this, court hearings in England are usually open to the public and no parties can obtain copies of judgments and statements of case.

Finality - There is certainty for the parties as an arbitral award is binding and the options for challenging an award are limited and difficult. By comparison, a court judgment can frequently be subject to appeal and an appeal of a court decision is more likely to be allowed.

Flexibility – Unlike litigation, parties are completely free to tailor procedures for arbitration to their specific dispute or make changes of procedure where required. The perfect example of this was during the pandemic when rules and guidance were quickly introduced to allow filing of documents online where possible to keep matters moving. In comparison, most courts were forced to suspend cases due to the lack of flexibility in procedure.

What are the drawbacks to arbitration?

Cost – Arbitration can be more expensive than litigation. Parties must, in a short space of time, pay arbitrator fees, venue fees, travel expenses, costs of any experts and witnesses as well as the administrative costs for the arbitration. These costs can be managed if parties agree clear and specific procedural steps and a firm timetable at the outset of the arbitration, which involves obtaining advice from experienced arbitration practitioners.

Delays – While it may appear that the arbitration process is quicker than litigation, the lack of sanctions imposed on parties who do not comply with procedural steps means that these delays can sometimes become extended. Some tribunals may be reluctant to impose sanctions on parties as this can lead to challenges to an award on the grounds that a party was not permitted to present its case properly.

Limited outcomes – With arbitration, the remedies available to parties are somewhat limited. Only those who are a party to the arbitration clause are bound by the award. In comparison for example, through litigation, if a party is granted a freezing injunction against its opponent, that injunction can be served upon a third party and that third party will be bound by it.

When drafting agreements, parties should consider their options should a dispute arise. It is naïve for parties to think that a contract or agreement will be performed without any issues arising, even if relations between parties are friendly. It is far more sensible to expect that disputes can arise in any transaction, and set out options from the outset on how to resolve those disputes. With arbitration, the parties can agree a method and procedure suited to the likely disputes that can arise with their particular matter and have the assurance that they will not become embroiled in litigation where an alternative method of dispute resolution is available.
Here are some interesting statistics from the past few years published by the London Court of International Arbitration (LCIA):

  • In 2019, parties commencing arbitration in in London, pursuant to the LCIA rules, came from 138 different countries.
  • In 2020, England remained the most popular seat for parties with 84% of all LCIA arbitrations being seated in England.
  • In 2021, only 5% of arbitrations involved parties that were both from the United Kingdom.

The number of challenges to arbitral awards remains consistently low and was 2.02% of all cases in 2019, 1.47% in 2020 and 2.17% in 2021. 
Arbitration as a method of dispute resolution can be very helpful to parties and should be carefully considered when drafting commercial agreements. As Benjamin Franklin said, “When will mankind be convinced and agree to settle their difficulties by arbitration?” 

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