Sector - Legal

Why arbitration is so popular in cross-border disputes

Most people in the construction and engineering industry are familiar with the term “international arbitration”. They understand that it is the most popular means of resolving cross-border disputes (together with amicable settlement).

However, parties often give little thought to a contract’s dispute resolution provisions and by extension why arbitration is so popular. This is perhaps unsurprising because when contracts are being negotiated parties tend to focus on building and maintaining good relations and the prospect of a dispute is hopefully remote.

However, if disputes arise, the dispute resolution mechanisms in the contract are critically important. When contracts relate to international projects, it is common for arbitration to be the forum of choice for finally resolving disputes.

So why is arbitration such a popular way of resolving cross-border disputes?

1. Enforceability of awards

It would be a waste of time and money to pursue a claim only to realise that your successful award cannot be enforced. Arbitration is therefore appealing because its awards are relatively easy to enforce.

This is because the New York Convention allows arbitral awards to be enforced in signatory states. With more than 150 contracting states this provides a strong basis for enforcement around the world and it is often easier to enforce an arbitral award than a judgment from a national court.

2. Avoids the need to use national courts

Where a contractor headquartered in one country completes works on behalf of an employer in another country, both the contractor and the employer may wish to avoid disputes being decided in one another’s national courts. For example, they may have concerns of judicial bias and, even if there is no such fear, they may worry that the party litigating in its own courts might gain an advantage by simply being more familiar with its domestic legal system. In the same vein, they may have selected a governing law that is common to neither of them (English law is common).

Arbitration provides an excellent means of avoiding these issues in cross-border disputes because it allows parties to have their disputes resolved by independent arbitrators. For this reason it is perceived to be a relatively neutral process.

3. Flexibility and speed

Although many court systems (including the English courts) constantly try to make litigation more efficient, arbitration is generally more flexible. The arbitral institutions’ procedural rules typically afford arbitrators a large amount of freedom to deal with procedural matters.

This can result in a bespoke procedure that suits the needs of all parties’ and the case in hand. For example, disclosure (i.e. document production) can be an onerous process, the burden of which can be mitigated by bespoke directions and arbitrator involvement.

This procedural flexibility and the fact that arbitrators typically have better availability than sometimes crowded national courts, means that arbitrations can often be concluded more quickly than domestic litigation.

Given the uncertainty and strain that disputes can place on parties, resolving matters quickly is often a key consideration, even if intense timetables can be stressful during proceedings.

4. Ability to choose arbitrators

Arbitration typically allows parties to choose who will determine their disputes and in the event that the parties do not specify a method of appointment, the major arbitral institutions provide mechanisms for selecting suitable individuals. There are various procedures governing precisely how arbitrators are chosen and how many there are. However, the general requirement is that they must be suitably qualified and experienced.

In English law, London-seated arbitrations, it is common to choose King’s Counsel (formerly Queen’s Counsel) barristers, or even former judges, to act as arbitrators. However, by way of example, it is possible to select engineers with particularly relevant experience.

This can be very appealing to parties because it enables them to choose individuals who they believe are best placed to resolve their disputes.

5. Confidentiality

Most court systems are open to the public and cases can therefore be reported by the media and seen by commercial competitors. By contrast, arbitration can usually be kept confidential. This can make arbitration very attractive to parties who do not want details of their disputes to be made public, where they cannot control the narrative.

Choosing arbitration

The above are just some of the reasons why arbitration is such a popular means of resolving cross-border disputes. As such parties should consider these factors, together with other relevant issues, when:

  • deciding how disputes will be resolved under their contracts; and
  • drafting arbitration agreements (usually contained within a contract’s dispute resolution mechanism) so that these agreements best fit their aims.

Finally, parties should not reserve their consideration of dispute resolution mechanisms for a project’s “top contract” only. Well-crafted dispute resolution provisions can be equally important at any stage and level of a project, for example when subcontracting or engaging consultants.

Article submitted by Jessica Tresham, partner, James Ignotus, managing associate, and Michelle Essen, legal director at law firm Womble Bond Dickinson