Arbitration is an alternative method of dispute resolution, distinct from methods like litigation and informal negotiations. It can be used if parties to a contract have a dispute and have chosen arbitration for dispute resolution in the relevant legal terms or agreement.
Arbitration is like litigation in that it is governed by rules addressing issues such as disclosure of documents and the exchange of evidence. Both arbitration and litigation result in a binding outcome for the parties. Unlike litigation, where your dispute is determined by a judge sitting in a court, in arbitration your dispute is determined by an arbitrator, who is a private citizen. An arbitrator is usually professionally qualified — for example, as a lawyer or an accountant.
The main advantage of arbitration over litigation is that it is confidential. The main disadvantage is that the parties involved have to pay the arbitrator’s fees.
If you opt for arbitration for your legal terms, you will likely need to make decisions about some or all of the following:
- the arbitral institution (the rules of that arbitral institution will govern the proceedings of the arbitration);
- the place or “seat” where the arbitration will take place, which determines the legislative framework that will apply to the arbitration (the legislative framework applies to the arbitration itself, while the governing law applies to the interpretation of your legal terms);
- the language in which the arbitration will be conducted; and
- the number of arbitrators.
These decisions may be further complicated if you anticipate cross-border disputes.
What is the arbitral institution?
The “arbitral institution” is the organization which specializes in managing arbitrations and provides the procedural rules and framework for the arbitration proceedings. There are many arbitral institutions in the world. Some focus on disputes in a particular region, while others specialize in international disputes. Additionally, some have specialized expertise in topics such as intellectual property or financial disputes.
Each arbitral institution provides its own rules for the arbitration proceedings. That means when you select an arbitral institution, you are actually selecting the rules of that arbitral institution to govern the proceedings of your arbitration. Typically, you would want to learn about (and factor in) the rules that govern the arbitration into any decision about the arbitral institution. If you are not sure which institution to pick to choose, please consult an attorney.
The place where the arbitration will take place is referred to as the “seat” of arbitration. A different legislative framework will apply depending on your selected seat. Depending on the arbitral institution, you may have a wide choice of international seats to conduct your arbitration or only local options. Most commonly, those “seat” options are cities. The city you select for your seat will determine:
- the legislative framework that will apply to the arbitration (i.e., the law of the country of the selected city),
- how courts might be involved during the arbitration, and
- your post-arbitration enforcement options.
For example, choosing Paris as the seat will mean that French law will apply to the conduct of the arbitration in terms of such matters as the enforcement of any arbitration award and the removal of the arbitrator. Additionally, French courts would be designated for any necessary court involvement. However, the arbitrator(s), not the French courts, will be the one(s) applying the governing law of the contract to determine how to resolve the dispute.
Enforcement possibilities are important to consider should you need the court to do things like enforce an arbitration award.
It is important to carefully consider all of these determining factors when selecting a seat. If you are not sure which seat to choose, please consult with an attorney.
Arbitral Institution Rules: These are the procedural rules established by each arbitral institution and will be used to conduct the arbitration.
For example: Your arbitral institution may have rules around how you request an arbitration, the form you would submit, time limits to respond to a request for arbitration and any counterclaim, the appointment and confirmation of the arbitrators, the required number of arbitrators, and potential challenge of said arbitrators, filing fees, and other costs, including which party pays for what.
Legislative Framework: This is the country’s laws in relation to arbitration on their own turf and may have an impact on how the courts might be involved during the arbitration and your enforcement options.
For example: If you choose a Paris seat, French arbitration law will be the applicable legislative framework, meaning the courts of France will be designated for any necessary court involvement.
Governing Law: This is the law that will be used to interpret the terms of your contract and assess who is right and who is wrong in a dispute.
For example: Your governing law will often be a mix of written law and jurisprudence which will constitute the lens through which your contract will be interpreted. In the EU and UK, there are mandatory laws in relation to consumer protection. Your behavior during the contract — as well as your legal terms — will be scrutinized to ensure that you complied with such consumer protection laws. Your selection is important because some behaviors or terms may be acceptable under US law but not under EU or UK law.
Note: Governing law applies to your legal terms more broadly, and must be selected for your legal terms whether you select litigation or arbitration. However, it is important to keep in mind your choice of governing law when considering things like where your arbitration will take place. Although technically you could select a seat in a different country than your chosen governing law, that would be in practice potentially very complex. Generally, the simplest approach would be to choose a seat in the same country as your governing law. If you are considering choosing a seat that is in a different country than your governing law, please consult an attorney.
What is the language of arbitration?
Although this is unlikely to be relevant to purely domestic arbitrations where a language may impose itself (e.g., English in the United States), in other circumstances, such as cross-border transactions or in countries where multiple languages are spoken, you may need to select the language in which the arbitration will be conducted. The language chosen would most likely be the same as that of your legal terms.
When do I get to select the number of arbitrators?
The number of arbitrators may depend on your arbitral institution. Some arbitral institutions may specify a set number of arbitrators (usually one or three). Other organizations may allow you to choose the number.
Additional considerations: Cross-border versus Domestic Disputes
What kind of disputes are you anticipating?
When selecting a dispute resolution method, you should consider what kind of disputes you anticipate. For example, are you expecting your disputes to be limited to disputes within a single country? Or will you likely be dealing with cross-border disputes?
Arbitration for domestic disputes: While in some countries, like the US, arbitration is a popular choice for domestic disputes, in others it is not. As such, we encourage you to seek legal advice before you opt for arbitration.
Arbitration for cross-border disputes: For international trade, arbitration is a popular choice for cross-border disputes amongst global, sophisticated companies for their business-to-business trading. However, it is not usually recommended for online trading (even in business-to-business circumstances) and especially not for consumer-focused businesses.
Arbitration has some pros and cons when compared to litigation, depending on the circumstances of the dispute:
- Pros: The main perceived benefits of arbitration are secrecy, ease of enforcement, and the ability for parties to decide location and procedure (and in the US to ideally avoid class actions). For cross-border disputes, arbitration is also considered to be a neutral international forum rather than choosing one legal system that may benefit the local party more than the foreign party.
- Cons: Arbitration can be a lot more expensive than litigation considering that parties have to pay for the arbitrators’ time and for the space, whereas in litigation, judges and a courtroom are free. Therefore, arbitration can be more suitable for complex agreements and large global companies.