The Decision to Arbitrate

Keywords: arbitration, decision to arbitrate, commence arbitration

Introduction

Arbitration has become a preferred mode of dispute resolution, and therefore, it is common for companies to incorporate an arbitration clause in their contracts. There seems to be growing consensus that arbitration is a far more streamlined and friendly alternative to court proceedings, especially for international contracts. It also has the added benefit of being customizable and confidential. However, not all disputes are arbitrated.

There is a significant decision-making process that precedes a decision to commence arbitration such as, existence of a substantial enough dispute that justifies a study of the arbitration clause. Post this, several other factors guide and influence this decision-making process.

Factors to Consider in a Decision to Arbitrate

The conversation starts with the nature of the dispute and whether there are any merits to the claim. This process is marked by discussions between the parties to assess each other’s position and attempt amicable resolution. Suppose the claim remains unresolved and a party concludes that it has a justifiable cause of action. In that case, the conversation continues into more unstructured, albeit dynamic territory, which is the subject matter of this piece.

Besides the merits of a dispute, many other factors govern and influence a decision to commence arbitration. As we look at some of them and gauge their relevance, it is also essential to consider how cultural and business ethics feature in the conversation.

Value of the Dispute

The first factor which influences the decision-making process is the value of the dispute. This represents the damages a party may have faced and seeks to recover or the restitution of gains by the other party. Irrespective, the value of the dispute carries enormous weight, but the degree of reliance on this can sometimes be misguided.

First, the computations done at this stage are preliminary, and thorough quantification of claims can be a tedious exercise. Second, the claims may be legally weak or unsubstantiated. Third, the other side could raise counter-claims to defend themselves. For instance, most construction contracts provide for liquidated damages for delay as a percentage of the contract price. It is common for the parties to assume that such a figure is the value of the dispute, especially in a young construction disputes industry like India or Malaysia. However, a claim for liquidated damages always needs further study and quantification and is hardly ever representative of the true value of the dispute for reasons mentioned above. This is also true for claims related to change order and variations in construction contracts.

Another example is a claim for unpaid dues, may fail because they were raised after the expiry of the limitation period. Thus, the value of the dispute may seem very high, but such quantification could be incorrect or the claim may be weak. This risk is somewhat mitigated by more experienced jurisdictions like the US and UK, where giant corporations have robust claim management systems in place. This ensures that trained experts handle claims and related evidence in a timely and proper manner.

Relationship between the Disputing Parties

Similarly, the relationship between the parties is another major factor that is often determinative of the decision-making process. This is because the relationship may be worth much more in business opportunities (past and present) than the value of the dispute. Here, cultural differences become more noticeable because different cultures give varying levels of importance to this issue. For instance, Japan has high regard for long-term business relationships. On the other hand, the US focuses more on future-oriented investment opportunities and may not prioritize this factor. Irrespective, it is uncommon to start an arbitration against a party with whom there will definitively be business interaction in the future.

Good Faith and the Issue of Fault

Good faith in relationships is a factor that operates behind the scenes and quietly guides the commercial strategy. It may not influence the merits of a dispute. However, the anger and indignation that follows unfair treatment could motivate an arbitration even if the value of the dispute is small. This concept is inherently subjective, and each party has different expectations from a commercial relationship. Conduct that is generally unprofessional or vexatious would be a good example to understand this better. For instance, denying legitimate claims simply because the application lacked a non-essential document.   

Closely allied to this concept is the issue of fault. The nature and extent of a party’s fault would depend on the facts of the case and the applicable contract. Even if it has no legal impact on the case or its success or failure, the fact that a specific party was at fault becomes a reason why businesses may overlook the potential difficulties in pursuing a dispute. It goes to the root of motivation. Arbitration, after all, is a complicated and time-consuming process, and there may be much cost and effort involved in the arbitration process depending on the seat of arbitration, jurisdictional challenges, availability and necessity of witnesses and experts, among other factors. While these factors may together justify an early settlement, the idea that a party is at fault and will escape liability becomes a compelling argument in the balance.

Logistics of the Arbitration

Some logistical concerns do justify an independent line of inquiry. For instance, the seat of arbitration or the language of the proceedings. Countries like the United Arab Emirates, Nigeria, or India do not inspire much confidence as a seat of arbitration, while Singapore or London makes the process seem friendlier. Regarding language, native English speakers tend to worry more about this issue if English is not the chosen language for the arbitration. However, non-native English speakers have an advantage here since they are accustomed to working with multiple languages.

During the last two years, Covid-19 related restrictions have also become factors inspiring some concern. For instance, conduct of virtual hearing and its impact on advocacy, feasibility and ease due to different time-zones, lack of access to witnesses who may be located in different parts of the world, etc. Not only have arbitration institutions truly risen up to these logistical challenges but the legal community has also proved to be very adaptable. But concerns are common especially if the parties come from a less litigious jurisdiction. 

Advice from Legal Representatives

In this process, the advice a party receives from their legal representatives also becomes essential. It is possible that the decision is made before any legal representatives get involved. This is not common practice. There is a cultural aspect to consider since some societies like the US are more litigious than others, which flows down into advice given by legal representatives. The legal representative’s confidence in success could sometimes go a long way in convincing a hesitant party, therefore becoming an essential factor.

Point in Time When the Disputes Arises

There is an added element of time here; not the time it takes to resolve a dispute, but the point in time when the dispute arises. For instance, the economic conditions prevalent when the dispute arose, the availability of business opportunities, employee utilization rate, cash flow concerns, and other similar prevalent conditions. A dispute may be abandoned for years if a party is pre-occupied with heavily profitable business opportunities. Subsequently, the same dispute may be re-initiated when the economic situation forces the company to reassess its debt and make recoveries where it can. These factors can have a subtle but definitive impact on the decision-making process.

Multi-tiered Dispute Resolution Clauses

These clauses comprise of different steps, each step utilizing a distinct dispute resolution procedure. The steps may be mandatory or discretionary, depending on the language of the contract. The advantage is that the multi-tiered clauses allow for a gradual and phased process for resolution of disputes, giving parties ample opportunity to resolve the matter amicably. In practice, however, the helpfulness of these clauses is debatable. Rather they merely add further complications towards a decision to commence arbitration.

When a party is considering the merits of arbitration, they have already failed at resolving the dispute amicable. Therefore, any non-adjudicative process is unlikely to be productive. Of course, this depends a lot of the nature of the dispute, the attitude of the parties and their best alternatives to arbitration. For some parties, their best alternative is to delay, in which case non-adjudicatory ADR processes (negotiation, conciliation and mediation) can be either very useful or very disruptive, depending on the perspective. More often than not, if negotiation has failed to resolve the dispute, further conciliation or mediation only delays the decision to arbitrate, rarely changes it.

Conclusion

In conjunction, the time we live in may also create an exponential number of new disputes because Covid-19 has forced corporations to re-negotiate contractual terms that have become inadequate for the present times. Similarly, some urgent solutions we have implemented to combat the pandemic, like restricted business hours, new workplace policies, e-payment solutions, fin-tech, shelter-in-place, and other solutions, may create unavoidable disputes. Such prevalence of disputes generally in society may impact the current positive perception around disputes avoided and costs saved. This would lower some of the hesitations a party feels in commencing an arbitration.

Thus, the decision to arbitrate is not easy for most parties, and much thought and risk analysis goes into the conversation. It is essential to understand these factors since they reflect in different stages of dispute resolution like should arbitration be commenced, like the selection of Tribunal, settlement discussions, and discovery. Moreover, the difficulty in the process directly impacts the time taken to ultimately resolve the dispute, impacting, in turn, the availability of evidence, quantum of damages, and other factors. Therefore, understanding this process of dispute initiation becomes essential in the big picture of dispute avoidance and/or resolution.

Niharika Dhall is currently a legal counsel at Toyo Engineering, Tokyo and has several years of experience as a commercial and arbitration lawyer under her belt. She has worked on complex matters across industries such as EPC, infrastructure, retail, payment systems and oil & gas. An awardee of the DAAD scholarship, she holds a Masters from Universität des Saarlandes and is a Fellow of the Chartered Institute of Arbitrators.

Preferred Form of Citation: Niharika Dhall, “The Decision to Arbitrate” (ICAR, 30 September 2021) <https://investmentandcommercialarbitrationreview.com/2021/09/the-decision-to-arbitrate/>.

The views and opinions expressed in the article are those of the Author(s) solely having been gathered from her experience as a practitioner. They do not reflect the official position of the institution(s) with which the Author(s) is /are affiliated. Further, the statements of the Author(s) produced herein should not be construed as legal advice.