Why Do Parties Choose Arbitration? To Each Their Own

Arbitration has flourished for centuries as a form of third-party adjudicated dispute resolution that is flexible, user-friendly, and independent of state courts while also rendering a binding decision readily enforceable by national courts. However, the world of international dispute resolution has been undergoing a broader sea change, with shifts in geopolitical and geo-economic power, the reassertion of sovereignty in international investment law, and an emerging proliferation of institutional competitors to arbitration, such as nationally grounded courts focused on international commerce. Does – or can – arbitration retain its relevance as an institution of global commerce?

To consider arbitration’s prospect, one may need to step back for a moment to ask why parties choose arbitration in the first place. Commercial parties may find domestic courts to be slow, inefficient, inflexible, and lack independence or sufficient expertise in the subject matter of the disputes. They may wish to benefit from the procedural features of arbitration that are not available in other forms of dispute resolution, most notably, litigation in state courts. The importance of arbitration is measured by its ability to provide these perceived procedural advantages for the parties. These advantages are often described in broad terms regardless of where the parties choose arbitration.

However, as our research project has emphasized, arbitration is not a uniform practice. Ultimately, arbitration in any given location reflects local cultures, norms, traditions, and expectations (see Tony Cole, “A Tale of Two Jurisdictions, Part One“; my earlier post, “Localised Globalism“). The role and importance of arbitration also vary from one system to another. Commercial parties choose arbitration in different parts of the world for different reasons. Some benefits are of particular significance in some jurisdictions but entirely superfluous in others. 

In some civil justice systems, the lack of trust for the judiciary may be a key consideration for the parties to choose arbitration. For instance, according to an OECD survey on judicial system satisfaction (2014), only 27% of Koreans are confident with the judicial system, amongst the lowest ranking in the OECD member states. [1]  Arbitration may appear an attractive alternative for parties who do not trust their judiciary. In other jurisdictions, concerns for the lack of independence of the judges may be the primary reason for parties to opt for arbitration, which allows them to choose their decision makers rather than to have a judge assigned at random to their case.

In systems with a high level of confidence in the judiciary, the role played by arbitration in assuring the independence of the decisionmaker may be less significant to the parties. Instead, they may prefer arbitration as a more efficient dispute resolution than domestic court proceedings. For instance, citizens’ confidence in the judicial system is very high in Denmark and Norway, with over 80% satisfaction in 2014. [1]  Some interviewees in Denmark have expressed concerns of overburdened judiciary and delays in court proceedings. This delay is partly caused by the lack of separation of the courts in dealing with civil and criminal cases. Every courtroom and every judge deals with both civil and criminal cases. The Danish government’s pressure to push for criminal cases within tight deadlines has resulted in delays for judges to deal with civil cases.[2] Arbitration thus might be seen as an alternative to the courts to provide a more speedy resolution of the disputes. However, given the tendency of parties to appoint judges as arbitrators[3], arbitration has resembled the court proceedings to a large extent, especially in some specialized arbitration institutions in Denmark (such as the Danish Building and Construction Arbitration Board). [4] Judge-turned arbitrators seem more reluctant to exercise their discretion to expedite the case and be more willing to grant extensions upon parties’ request, for fear of their award being set aside. [5]

In Egypt, arbitration is not seen as an efficient alternative. Indeed, it is often more expensive than going to court. [6] In addition, the Claimant will have to pay the money upfront and even cover the costs for the Respondent who did not pay their share. [7] Instead, parties may prefer arbitration given its flexibility and openness to creativity, as the domestic court system in Egypt is often viewed as being closed, bureaucratic and single-minded.  [8]

In other circumstances, the professional expertise of arbitrators is considered more significant. For instance, parties almost always choose arbitration to resolve shipping disputes in the United Kingdom, given the technical complications of such disputes. Parties may have to educate the judge on the terminology and technical details in domestic courts. In contrast, they can appoint arbitrators with skills and expertise in that particular industry in arbitration.  [9]

International commercial courts have been established to emulate these qualities for which the parties select arbitration, thereby competing with arbitration as dispute resolution mechanisms of choice. How well arbitration can retain its relevance and dominance as an institution of global commerce depends on how well it can retain its competitiveness in terms of such qualities. In considering such qualities, one must not forget the local considerations and particularities of the local court system to which a party often compares.

[1] https://www.oecd.org/governance/public-governance-a-matter-of-trust.htm

[2] DK5. 

[3] DK17, DK18.

[4] DK13. 

[5] DK4.

[6] EG8, EG9, EG18.

[7] EG6. 

[8] EG3. 

[9] UK17. 

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