The Disputes Dilemma

 MARKET VIEW – INTRODUCTION 

Quinn Emanuel’s Ted Greeno weighs up the pros and cons of the different dispute resolution options and offers his insight into which option to pursue

It’s an old chestnut: which is better, litigation or arbitration? This is the third attempt I have had at it. In the first, I wrote an article singing the praises of arbitration over litigation. In the second, I debated for the motion: ‘This house considers that litigation is better than arbitration’, at a Commercial Litigators Forum event. On that occasion, my opponent (now partner at Quinn Emanuel Urquhart & Sullivan), Stephen Jagusch, used the entirety of his allotted time to quote my article back at me. So I approach this question with caution.

Let me first say that I have no axe to grind. My practice is, and always has been, split broadly between litigation and arbitration, with some expert determination. This is important, as those who practise exclusively litigation or arbitration, as many now do, will have cause to extol the virtues of one over the other. For the same reason, however, you might be forgiven for thinking my answer to this evergreen question rather self-serving. For the answer is that it depends. Arbitrating a dispute can be better all round than litigating it; and it can be worse. It depends on numerous variables, including the nature of the dispute, which national court might determine it, the quality of the arbitral tribunal, the place of enforcement and the attitude of the parties, to name just a few.

Venue

First, and critically in any debate on this issue, one has to define what is meant by ‘litigation’ and ‘arbitration’ for these purposes. If the comparison is between an institutional arbitration (such as the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the International Centre for Dispute Resolution (ICDR), the Stockholm Chamber of Commerce (SCC), the Singapore International Arbitration Centre (SIAC) or the Hong Kong International Arbitration Centre (HKIAC) to name a few) as against litigation in a less mature or independent judicial system than we have, say, in London, then arbitration is likely to be preferable to the parties. Few courts around the world have the experience and expertise to deal with complex international disputes; and many are ill-equipped to do so, either through lack of resource or appropriately streamlined procedures; or because of real or perceived corruption. Even in the absence of these factors, depriving a counterparty of ‘home court advantage’ is also a critical driver of the undoubted growth in the popularity of international arbitration. But if the comparison is between institutional international arbitration and litigating in the English Commercial Court, the debate is more complex. As it is impossible to compare international arbitration with litigation in all the courts of the world, I will concentrate on a comparison with litigation in London.

Cost

For many, the debate boils down to efficiency: time and cost. Traditionally, arbitration has been promoted as being cheaper than litigation because its processes are typically less formal. However, this is too much of a generalisation. It is true that there is a certain amount of additional cost which flows from the increasing bureaucracy and front loading being introduced to commercial litigation, the latest being the requirement for the preparation of case budgets for cases worth under £10m. The memorial process for exchanging submissions and evidence is also often more efficient than the traditional High Court model.

‘Arbitrating a dispute can be better all round than litigating it; and it can be worse.’Ted Greeno, Quinn Emanuel

However, the primary factors in determining the costs incurred in any reasonably complex commercial case will be the time to trial and the efficiency of the lawyers. The longer a case takes, the more it tends to cost regardless of whether it is arbitration or litigation. Parkinson’s law invariably prevails and is truly international. And the time it takes to come to trial is usually driven by the availability of the court or the tribunal for a trial at the optimal date. Once a trial date is fixed, unless it is unrealistically early, the parties will be ready for it and the timetable will compress into the intervening period. Very busy arbitrators can delay a case coming to trial, which brings increased costs, as can lengthy jurisdiction hearings and interim awards. On the other hand, lead times in the Commercial Court can fluctuate and at present are longer than they have been for some time.

The efficiency of the lawyers working on the case is the other overarching factor. It is not so much the level of the hourly rates charged as the number of hours recorded that drives up legal fees. And in large cases, inexperienced lawyers can easily spend a great deal of time on unnecessary and peripheral tasks which add little value. Here, the balance favours litigation because the courts have the capacity to assess legal bills and cut them down. Arbitrators, by contrast, are less likely to question a party’s bills, not least because they do not have the resources to do so, and the only pressure on fees has to come from the client.

The wide-ranging scope of disclosure/discovery in the courts is often identified as a factor which inflates litigation costs. This is probably overstated. Disclosure directions in arbitration commonly now adopt the procedure set out in the International Bar Association (IBA) Rules on the Taking of Evidence in International Arbitration, with each party disclosing documents they rely on and then requesting further specific disclosure from each other. This can often be just as expensive as disclosure in English litigation since all relevant documents have to be searched for and dealing with specific disclosure in Redfern Schedules requires relatively senior lawyer input. Moreover, since the Jackson reforms, standard discovery is no longer the default option in the Commercial Court. The court may dispense with disclosure altogether or, at the other end of the spectrum, may order what is akin to the old ‘Peruvian Guano’ or ‘train of inquiry’ style of wide-ranging disclosure. It can also order the equivalent of IBA rules disclosure. For now, however, parties still tend to default to standard disclosure and I suspect that is because it is a happy medium in most cases and parties prefer it to the alternatives. In truth, many commercial parties like to know that they will be able to get access to helpful documents from their opponent if they get into a dispute.

Of course a further expense in arbitrations that is not encountered in the courts to any significant degree is the cost of paying for arbitrators, venues, and the administrative institution. For now, at least, court fees are very significantly less.

The attitude of the parties to resolving the dispute

In cases where both parties are committed to resolving the dispute speedily, arbitration is often a quicker and more efficient process. Parties can agree upon a relatively swift timetable, appoint tribunal members whose schedules are compatible with a speedy process, and have their dispute determined on a fast-track basis. The most efficient arbitrations, in my experience at least, are those where the parties have agreed to arbitration only after the dispute has arisen, especially where they and the tribunal sign up to terms of reference which include procedural directions and a trial date. On the other hand, where one party is looking to obfuscate and delay proceedings, litigation may be the better course. Recalcitrant parties can make procedural challenges (sometimes in far flung local courts), disregard time limits set by tribunals and otherwise delay proceedings in numerous ways. Not all tribunals feel able to take a tough line with such parties for fear of their award being challenged for procedural unfairness down the line. In such cases, litigation may be preferable because the courts have more potent penal powers, including the ability to apply costs sanctions.

Nature of the dispute

Arbitration offers flexibility in the choice of arbitrator, so in cases where a non-lawyer arbitrator would be suitable, such as rent review arbitrations for example, arbitration may be better. Where there are significant legal issues at play, of course, one should be cautious in appointing non-lawyer arbitrators, especially where the parties themselves are represented by lawyers.

Confidentiality

Arbitrations are usually conducted behind closed doors. By contrast, in litigation before the English courts, non-parties may access all statements of case and other documents lodged at court (subject to certain exceptions). Documents referred to in open court also come into the public domain and it is not unusual in high-profile cases for parties to try to gain an advantage by feeding the press. These potentially unwelcome consequences of contesting a dispute should not arise in international arbitration. For example, arbitration agreements governed by English law include an implied duty of confidentiality. Some institutional rules also make provision for confidentiality. (The LCIA, ICC and the ICDR all make provision for either automatic confidentiality or for confidentiality to be imposed upon request.) Although confidentiality is often cited as one of the main reasons that commercial parties opt for arbitration, it is not always an advantage. Some parties take the view that the threat of publicity can discourage counterparties from acting in breach of an agreement. The absence of confidentiality may also discourage parties from bringing speculative claims.

Witness credibility

Given the lack of penal power in the hands of an arbitral tribunal, witnesses sometimes feel less constrained to tell the whole truth in arbitration than they would in the more intimidating atmosphere of a court.

Cultural understanding

In nearly 35 years of practice, I have found that a sense of cultural understanding is important to do justice in cases with an international element. Some parties feel they can be culturally misunderstood in an English court; and indeed they may be. For instance, a failure to say something may be misconstrued in an English court in a way that it may not be before a more culturally compatible arbitral tribunal. The flexibility afforded in arbitration, where parties can choose their own arbitrators (and sometimes the chairperson of the tribunal), is one of arbitration’s greatest advantages over English litigation – especially where, as in modern day commerce, counterparties are often based in different corners of the globe.

Enforcement

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention) provides for reciprocal enforcement of arbitral awards between around 150 signatory countries. The ability to enforce awards (and agreements to arbitrate) throughout this network, without local courts having more than a very limited power to decline to enforce, is often cited as the best reason for agreeing to refer disputes to arbitration under international contracts. It is difficult to argue against this in theory. However, it is relatively unusual in my experience for parties not to comply voluntarily with arbitral awards, at least in commercial arbitrations involving non-state entities. Reliance on the New York Convention is therefore overplayed to some extent. Further, although there is no similar global standard for the enforcement of court judgments, many jurisdictions have reciprocal arrangements with the English courts – the most obvious being the arrangements in place between European states under the Brussels and Lugano Conventions. A notable exception is the US. In many such countries, however, one can bring an action on a judgment and apply for summary judgment relying on res judicata if it is contested, and it will not take much longer than enforcement under the 1958 Convention. A case-by-case approach is required. Parties should always consider whether there are bilateral or multilateral treaties in place between the relevant jurisdictions (that is, where the judgment is issued and where the recalcitrant party has assets). But this will not always be the most important factor in deciding what is the best forum.

Finality and the right of appeal

Many supporters of arbitration argue that the lack of a right of appeal – save in very limited circumstances – is a real advantage of arbitration over litigation. It is said that arbitration enables parties to reach finality faster; and that commercial parties do not want appeals. I have always been rather sceptical about this mantra. This is not a criticism of arbitrators in general, most of whom act with intellectual rigour and integrity. However, there is a real danger, at least in principle, that the lack of a right of appeal removes the coercive discipline on arbitrators to apply the law and be intellectually disciplined in their awards. In simple terms, arbitrators know that there will be no-one marking their work (save possibly on extremely narrow and limited grounds). On the other hand, the right to appeal invokes a degree of scrutiny and instils that discipline. High Court judges are aware that the Court of Appeal may well review their judgment; although that is not to say that one does not get the occasional sloppy judgment in the English courts. In a market where arbitrators are dependent on the commercial legal community for future appointments, this lack of an ability to scrutinise awards and reverse them if they do not stand analysis is a theoretical concern at least.

‘There is a real danger that the lack of a right of appeal removes the coercive discipline on arbitrators to apply the law and be intellectually disciplined.’

Nor do I hear unwavering views on this subject from commercial parties and their general counsel. If they find their companies in large complex disputes, many prefer to know that, if something goes wrong at first instance, there is a right of appeal. And, with the best will in the world, some cases are so complex that the fact-finding task of the first instance judge or arbitrators can cloud the legal conclusions that should properly be drawn from them. If one studies the number of complex commercial judgments that are reversed on appeal, this conclusion cannot be denied. Ultimately, however, most parties want to feel that they have had a fair hearing, that their case has been fully understood and that the decision is based on an impartial and detailed analysis. They do not want a ‘quick and dirty’ solution to high-value disputes.

Multi-party scenarios

In the absence of agreement, a tribunal has no power over third parties. This is a particular difficulty where you have a suite of agreements with different groups of parties being party to each agreement within the suite. In the absence of effective drafting (which often tends to be the case), a tribunal appointed under one agreement cannot force parties to other agreements to take part in any arbitration and any subsequent award will not be binding on those parties. If there is no express agreement to that effect there is also no scope for tribunals hearing a series of separate but related disputes to consolidate those disputes and hear them together, even if those disputes arise under the same agreement or between the same parties. There is accordingly considerable scope for delaying tactics where there are multiple parties and/or multiple contracts containing arbitration clauses in any dispute.

‘In the context of international contracts, litigation in the home courts of the parties is often too unattractive an option for fear of home-court advantage, glacier-speed court processes or worse.’

That is not to say that the courts do not lend themselves to forum shopping; of course they do. The commencement of pre-emptive proceedings in friendly courts, or courts which can be relied upon to move very slowly, can be a real risk in international cases.

Conclusion

There are many learned pages written on each of the topics I have cantered through above and it is not possible to do them justice in a short piece. However, the bottom line is that generalisations on this subject are particularly unhelpful. There is no clear winner of this debate. The reality is that it is ‘horses for courses’. In the context of international contracts, litigation in the home courts of the parties is often too unattractive an option for fear of home-court advantage, glacier-speed court processes or worse. For this reason, international arbitration continues to grow rapidly as the preferred method for international dispute resolution. However, it has its faults, and for certain types of case in which confidentiality is not important, and the parties can be expected to abide by the decision, there is much to be said for turning to the London Commercial Court as a first choice.