Clients sometimes ask us why in some commercial contracts we recommend that disputes are handled through the English courts, but in others, we recommend an arbitration clause. Sometimes it comes down to a question of judgment but there are factors, which weigh more heavily in favour of one choice rather than the other.
First of all, let’s be clear, that the up front costs of issuing arbitration proceedings are far higher than those for issuing a court claim…….so why bother?
Large companies like the idea that arbitration proceedings can be kept confidential, unlike court proceedings, which can be publicly reported on in most cases…..but proceedings involving smaller companies are unlikely to attract much publicity unless they raise an important point of law…….and so the confidentiality argument does not typically recommend arbitration to most smaller businesses when factored against the additional costs. Proceedings tend to conclude more quickly at arbitration rather than through the courts……but then if you are the party being sued, that may not feel like any sort of an advantage!
The most important reason (typically) for a smaller business to consider an arbitration clause in a contract, is if company A based in the UK is entering into a contract with company B based outside of the UK. This is because of a nifty international convention called the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”). Originally signed in 1958, most of the major trading nations of the world are now a party to this Convention, and it does what it says on the tin. It ensures the recognition and enforcement of foreign arbitral awards in any Convention country, pretty much as though that foreign arbitration award had been a obtained as a domestic court order.
Where there is a bilateral treaty on the mutual recognition of court awards between country A and country B, it should be as easy to enforce in country B, a court order obtained in country A, as it is to enforce in Convention country B an arbitration award obtained in Convention country A, but I have to say that practical experience very often tells a different story. I have been involved in a few absolute horror stories over the last twenty-five years, arising out of attempts to enforce UK court awards internationally, with the all too familiar approach of some country courts being to re-open and re-hear the entire case to see whether or not they would have arrived at a different conclusion from the UK court – particularly where one of their nationals is facing a hefty award for damages if they do not do this. The cost of issuing arbitration proceedings then starts to look like “value for money” vs running a litigation in the UK and then effectively another litigation in a second country.
Even worse, notwithstanding language in the Contract, which provides that disputes should be referred to the English courts and that English law should be applied, “without reference to its conflict of law principles”, it is more common than you might think for a UK judge to refuse jurisdiction in relation to a case started in a UK court, based on those very English conflict of law principles, which were supposed not to apply to the Contract. You can always try to appeal that kind of judgment but not all clients have the appetite or the funding to do that. These particular jurisdictional problems do not arise where there is a comprehensively drafted arbitration clause.
Now even where arbitration seems as though it might be the best choice for a particular contract, there may still be situations where you might want to reserve the right to issue court proceedings rather than arbitrate (perhaps if the case is very straightforward, like a simple debt recovery claim). It is for this reason, that we recommend language, which gives the power to the claiming party to elect either arbitration or English courts in relation to any dispute, and takes away from the other party the right to challenge the selection of jurisdiction made by the claiming party.
If you would like some guidance on appropriate contract language on jurisdiction for an international contract or advice on the arbitration vs courts issue more generally, contact firstname.lastname@example.org for further information.