On some advantages of arbitration - and disadvantages.

In my last post, I talked about arbitration proceedings with a surprising outcome.

There are several differences between arbitration and Court proceedings. I highlight 3 differences which are relevant to commercial decision-makers, and 1 takeaway for your next contract negotiation.

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3 differences:

(a) when going to Court, the dispute is decided by a Judge (and in some jurisdictions, a jury as well). In arbitration, the arbitrator(s) decide. Sometimes, the parties can agree on the identity of a sole arbitrator. Other times, each party nominates an arbitrator, and the 3rd arbitrator is appointed by other means.

As such, in arbitration, parties often have a bit more control over who decides the dispute. For example, in a technical dispute requiring industry knowledge, there may be value in appointing an arbitrator who is familiar with the concepts in play. On the other hand, if your client is seeking to advance a position that goes against orthodox thought within the industry, there may be more value in nominating an arbitrator with fewer pre-conceived notions to be overcome.

(b) arbitration proceedings are confidential. Conversely, Court proceedings are public (but with exceptions). As such, if the subject matter of a dispute is likely to be embarrassing to one of the parties, that party might, at the point of contracting, prefer an arbitration clause.

On the other hand, if there is a dispute brewing, one party has more to lose if the dispute were widely publicised, and there is a choice of Court clause, that party might have an additional incentive to settle on confidential terms.

(c) if the arbitrator(s) get the law wrong, that is usually not a ground of appeal. In many jurisdictions, the Court's initial decision can be appealed. However, arbitration awards are generally not appealable, and can only be set aside in very limited circumstances.

This means, for example, that the arbitrator(s) are free to order that the baby be split, even if the law does not allow for it. Even if it is clear to the casual onlooker that the outcome was based on a misapplication of the law, the aggrieved party often has no recourse.

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Takeaway:

Most well-drafted agreements have a dispute resolution clause, which specifies whether a dispute is to be resolved by way of arbitration or litigation. This is often referred to as a "midnight clause" - i.e. drafted only at the tail-end of negotiations, and quickly glossed over without much thought.

The next time you negotiate a contract, I suggest that there is value in asking your lawyers, early on, what are the consequences of either party breaching the contract. This should naturally segue into a discussion on the dispute resolution clause that best suits your needs, and put you in a better position when the time comes to negotiate the dispute resolution clause.