ADR: Arbitration Versus Litigation: What Is the Best Bet?

ADR: ARBITRATION VERSUS LITIGATION: WHAT IS THE BEST BET?

Both have their merits and demerits and need to be decided based upon several factors including cost, time and confidentiality

As we all know, any dispute is bad for business. There are a number of reasons for this. Any dispute is expensive both in terms of cost and time. Many a time we do not consider the collateral damage when facing dispute. The damage is loss of customer, joint venture partner, business partner and above all reputation. It is, therefore, essential to deal with a dispute proactively and to redress it at the earliest.

Is dispute avoidable? The answer is probably 'no' since it requires two hands to clap. However, what we can do is to minimize its chances and develop a mechanism to redress it quickly at minimum cost and time.

As I have said before, there are many disputes which are preventable. Experience shows us that most of it originates from weak and bad drafting of legal documents including contracts. Many a time we sign legal agreements which are not clear and which lack specifics. Since the obligations are not clearly brought out in an agreement, it may give rise to dispute which may eventually go to arbitration or litigation. So, it is vital that any legal agreement has as much clarity as possible. Sometimes we do not emphasize enough on drafting a proper dispute resolution clause. This aspect needs to be seriously taken care of.

It is important to develop a Dispute Resolution Policy which will identify steps that will be taken at the beginning of a dispute. I always emphasize developing an Early Warning Signal. If it is properly developed and rehearsed, it will lessen the adverse impact of a dispute. In case of a large organization, it is important to "educate" the concerned as soon as a contract is signed. This will help them understand the details of a contract but also ensure that they know the steps to be taken before a dispute becomes critical.

Once a dispute occurs, mediation is the first step to resolve it. It can be formal or informal mediation. A legal contract should make adequate provisions to deal with the mediation. It should be conducted in a manner which can resolve a dispute. Mediation can be handled with inhouse senior representatives or through a professional mediator. Mediation can be ad hoc or institutionalized. If it is latter, it can be conducted as per the rules of the International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA) or Singapore International Arbitration rules (SIAC). There could be other rules too. However, these are globally accepted rules.

If mediation fails to deliver results, the parties may need to resolve the dispute by litigation or arbitration. Both have their own advantages and disadvantages. Let me analyze them below.

Take arbitration first. It has certain advantages of its own. It is faster. It can maintain confidentiality. Arbitrators may be industry experts who understand the issues if they are technical in nature. The arbitrators can draw their own rules for managing the arbitration. However, it has a few drawbacks. It could be quite costly especially if we follow institutionalized arbitration like ICC, LCIA or SIAC. Arbitration can be lengthy as well. Sometimes it is difficult to find appropriate arbitrators especially in case of technical disputes. Further, much will depend upon the arbitrator(s) themselves and their approach to resolve a dispute in the shortest possible time.

There is an option especially in case of construction contract where adjudication by a court may be possible. These courts may specialize in construction dispute. Their judgments will, therefore, be quick and practical. ICC has recently brought out 'Dispute Resolution Board' to resolve a dispute quickly before it goes for arbitration.

The other option is litigation. We are all aware of its strengths and weaknesses. A litigation can be costly, time consuming and may be subject to appeal. In this situation, dispute redressal may take a number of years which may be harmful to business. Above all, it is generally not possible to keep a litigation confidential. However, because of strategic reasons, sometimes we may go for litigation which gives finality unlike arbitration.

Whether it is arbitration or litigation, the role of inhouse and external lawyers is paramount. For inhouse lawyers, a strategy needs to be developed for arbitration or litigation. External lawyers can play a vital role in shaping up the strategy. While engaging an external law firm, we should be careful in selecting them. Having proven expertise and success, along with costs/fees, are the main determining factors. Fees can be prohibitive, however, these days we can negotiate for fixed fee, stage-wise fee and sometimes even success fee, if permissible in a jurisdiction. Inhouse lawyers need to develop a good working relationship with their external counterparts. In lengthy arbitration or litigation cases, a proper reporting system needs to be developed to keep the management informed. Both would require evidence and cross examination of witnesses. These are delicate matters and need to be handled carefully.

As I have said before, every business enterprise should try to avoid disputes. One way of avoiding disputes is to develop clear and enforceable legal contracts followed by creating early warning signals to detect dispute. If disputes are inevitable, then we need to take a call on its resolution process either through arbitration or litigation. In case of cross-border disputes, enforceability of a judgment is critical. Therefore, arbitration or litigation needs to be decided considering this angle also. Both have their merits and demerits and need to be decided based upon several factors including cost, time and confidentiality.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.