Court or arbitration in contracts? Many contract drafters base their choice on hearsay or one or two bad experiences in arbitration. There are important factors that should drive your decision, however. But not myths. The principal question is whether disputes should be settled in court or by means of arbitration.
Decisive factors. The important decisive factors for arbitration instead of public court proceedings are:
- Enforceability of a decision. Arbitration is almost inevitable if there is no treaty between the countries in which the final decision must be executed and the country of an agreeable court (e.g. a convention for the enforcement of foreign judgments, such as the Convention of Lugano or the ‘Brussels Regulation’). The New York Convention of 1958, facilitating the enforcement of arbitral awards, has been ratified by an impressive number of countries.
- Confidentiality. In arbitration, even the existence of a dispute is secret. If this is important, it may be desirable to provide that the arbitration institute will not publish the arbitral award (or at least not any identifying elements of the case).
- Greater expertise of arbitrators. The parties may provide for effective appointing rules to establish the arbitral tribunal. Even if the parties did not provide anything on the nomination or appointment of arbiters, an arbitration institute will likely consider the desirability of bringing a true expert ‘on board’.
- ‘International’ approach of a dispute. In court procedures, the foreign party will likely feel uncomfortable and uncertain about the somewhat patriotic or chauvinist attitude the court may take vis-à-vis its local counterpart. Also, in arbitration, the tribunal may be more receptive to international quality standards or service levels and transnational best practice rules (e.g. Lex Mercatoria) and less amenable to formalities required by the applicable law.
- Speed, although arbitration is sometimes slower. This argument is often misplaced. It is not generally true that arbitration is slower than court proceedings. On the contrary, in some countries civil procedures are considerably slower or much more burdensome.
- Adaptability of the arbitral procedure.
Whatever the parties agree, they should certainly not provide for arbitration and a choice of court at the same time. Also, if the choice is made for arbitration, it is highly unusual to provide for a right of appeal (not even in a court) and the decision not to choose arbitration should not be driven by the lack of such right of appeal.