Arbitration clauses often appear in contracts without the parties or sometimes even their lawyers having thought through whether going to arbitration will be in their best interests should the parties ever fall out. 

Arbitration clauses are often part of the "boilerplate" clauses about which there is little negotiation or thought.  It's only when a dispute arises that the parties are faced with trying to understand what has been agreed and whether that will prevent further dispute and reduce delay. 

Arbitration is often confused with mediation or other forms of dispute resolution. In fact it has much more in common with court proceedings   Arbitration is a formal dispute resolution system run by private organisations, including for example the International Chamber of Commerce. 

The recommended ICC arbitration clause is:

"All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said rules."

Advantages

Arbitration is confidential and, if you wish to make sure that any dispute or the terms on which the dispute is resolved does not become public, an arbitration clause can be a great advantage.  In the English Courts the principle is that proceedings should be open to the public so that publicity can act as a safeguard against unfairness, injustice and arbitrary judicial decision making. In fact the Civil Procedure Rules changed in 2006 so that anybody may obtain copies of all statements of case on the court file, including defences, without having to obtain the court's permission.   

Many people are concerned that disputes about commercial arrangements or technology and disputes that might damage a party's reputation should not be made public.  The existence of major litigation may affect the listed share price of a company, particularly in patent cases where the outcome could determine whether the business will be able to continue with a product line.

Arbitration may also be useful when parties from different countries cannot agree which courts should have jurisdiction to hear any dispute between them.  Each party will want the courts of its own country to hear the dispute.  Going to arbitration may be a way around that problem, but when negotiating an arbitration clause you also need to agree a location for the arbitration and agreeing this can be just as difficult as agreeing which national court is to have jurisdiction. 

If confidentiality and jurisdiction are not concerns then there are no clear advantages to arbitration.  Arbitration used to be viewed as being quicker than going to court.  There are some jurisdictions in which this is the case, but since the civil litigation reforms in the English courts it is unlikely that an arbitration will be concluded in a much shorter timescale than English court proceedings

Expense

Arbitration is not a cheap alternative to litigation.  You should bear in mind that the procedure followed in arbitration for the presentation of each side's case and the disclosure of evidence is likely to be similar to UK court procedure.  In addition the parties must also pay for the arbitrator and venue.  In large commercial disputes it is often agreed that there will be a panel of three arbitrators and this will increase the cost. 

Rules

There are a number of organisations that provide arbitration administration services such as the International Court of Arbitration. Each has its own rules.  Before agreeing to arbitration through a particular organisation it is important to investigate which rules will apply. 

Arbitration clauses in a contract can be complex, dealing with issues that may arise in the arbitration.  Those issues will include: setting a mechanism and timetable for appointing an arbitrator; setting out exactly what powers the arbitrator will have in terms of granting remedies such as injunctions; whether the losing party will pay the other party's costs; and whether the either party may appeal to a national court against the arbitrator's decision.  If those provisions are omitted, the conduct of the arbitration and the arbitrator's powers will be governed by the laws of the country where it has been agreed the arbitration will be held.  For example, in the UK there are extensive provisions governing arbitration under the Arbitration Act 1996. 

The fewer provisions you have in the contract the greater the delay if and when you try to initiate an arbitration.  It will usually be in the defending party's interest to delay matters and to make the choosing and appointment of an arbitrator as difficult as possible.

An issue that is often forgotten in arbitration clauses is whether the parties agree that some powers are to remain with the courts and not the arbitrator.  For example, in the absence of any agreement, the losing party will be able to appeal to a national court against the decision of the arbitrator under the Arbitration Act 1996.  Some clauses are vague as to whether this is the case or not and that vagueness leads to more time and money being wasted on arguing over whether there is a right of appeal. 

The relationship between what powers arbitrators have and those that are left with the courts was illustrated in the case of Vertex Data Science Limited v Powergen Retail Limited in which Powergen sought to stay Vertex's application for an injunction from the court under section 9 of the Arbitration Act 1996.  The parties had agreed a lengthy and complex arbitration clause and the court had to decide whether the parties had agreed that, although the arbitrator would not have the power to grant an injunction, the court could still do so.  The judge concluded that on the clause as drafted the parties had intended that court could hear an injunction application even though he did not think it sensible that they should have done so. 

Comment

The implications of going to arbitration should be carefully thought through.  Arbitration should not be assumed to be cheaper and easier than going to court. 

Contact Details

If you would like further advice about any of the issues considered above please contact Paul Northwood on 01869 331753 or email him at paul.northwood@northwoodreid.com

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This article is not intended to be, and should not be taken as being, legal advice. The law often changes and it varies from jurisdiction to jurisdiction; the information in this article is generic in nature and specific legal advice should be taken before acting on any of it.

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