Arbitration explained: what is it, why use it and when to use it

This blog post will explore what an arbitration is, its strengths and weaknesses, and when it should be used as an alternative to litigation.

What is arbitration?

An arbitration is a form of alternative dispute resolution (ADR) which can be used to settle your legal dispute without going to court. While arbitration is an alternative to litigation, the process involved is highly similar. In an arbitration, you and the other party can set out your respective arguments and disputed claims before a decision-maker (that is, the arbitrator). The arbitrator will then make a determination (called an 'award') on your dispute which is legally binding, just like a court decision.

How does arbitration arise?

Arbitration is triggered by an arbitration clause contained in your contract. The arbitration clause will typically provide that if a dispute arises in respect of the contract or matters that come within the scope of the contract, the matter must be referred to arbitration.

Advantages

Costs

While arbitration tends to follow similar procedures to a court proceeding, it has many advantages compared to litigation. One advantage is that arbitration tends to be a more cost-effective and quicker way to resolve a legal dispute. While it may take several years to procure a court trial date, an arbitration date can usually be obtained within a few months, based on the availability of parties and the arbitrator. In an arbitration, parties can also dispense with rules of evidence and procedure that apply in litigation, which tend to be complex and time-consuming. This includes the process of discovery, which is an interlocutory step in a court proceeding where parties must disclose all relevant evidence that relates to the proceeding.

However, be aware that if you have a complex dispute where the amount in issue is significant, the costs of arbitration may quickly rise and be similar to what is required for litigation.

Confidentiality

Moreover, arbitration proceedings are confidential, meaning that the decision of the arbitrator will not be made publicly available. This is particularly relevant when your dispute concerns issues relating to intellectual property, trade secrets, or other matters that you may not wish to be released into the public domain.

Flexibility

Another key advantage of arbitration is the flexibility of proceedings. You and the other party will usually be able to select your own arbitrator, unlike a judge. In addition, you will also often be able to apply the set of arbitration rules of your choice. These rules typically set out how the arbitration hearing will progress and other procedural aspects of the arbitration. This means that the proceedings can be simplified and only involve agreed necessary steps and be personalised to suit the particular transaction or issues in dispute. Moreover, you and your counterparty can also dictate where and when you want the arbitration hearing to take place.

Disadvantages

It is important to acknowledge that arbitration is not without its limitations.

No process of appeal

Arbitration as a process does not have an appeals mechanism (unless so specified in the contract - which is unusual). This is in contrast to the courts where you have the option of asking a court that is higher up in the hierarchy to have a lower court decision reviewed. If you are unhappy with the decision of the arbitrator, your only recourse is to apply to the court to have the arbitral award set aside. As such, there is the potential that you may invest time and money in trying to resolve a dispute out of court, and then still end up having to go to court. This means that parties may end up spending greater sums overall.

Lack of discovery process

Although arbitration proceedings may have lower costs due to the absence or simplified discovery process, this could mean that the parties may not have access to all the relevant information to evaluate the case. As such, a party may present their case before an arbitrator without being aware of all of the critical facts that could have been revealed if a more thorough process of discovery, such as interrogatories, requests for production, had been conducted.

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If you are interested in discussing arbitration further, please reach out to the Dexterity Law team here.