Posted: Wednesday, 17 March 2010 @ 10:32
Arbitration is the oldest form of procedure for dispute resolution out of the courts. It grew up due to the need to have a forum for resolving international trade disputes, for example shipping and carriage of goods. It is only usually relevant in high value cases, as it can be just as expensive as a court action.
Arbitration is similar to court proceedings. The final decision, known as an award, is final and binding, and enforceable through the courts. There are a number of international conventions, for example the New York Convention of 1958, which allow an arbitration award to be enforced in any country in the world regardless of where it was made. That is why it is so attractive and so relevant to international trade. But arbitration agreements can be found in all sorts of business arenas. For example, the rules of the Football Association require arbitration in disputes between clubs. That is why in February 2009 West Ham United was prevented from going to the Court Of Arbitration for Sport in Switzerland to appeal an award made in arbitration proceedings in their dispute with Sheffield United. The FA rules provide that there is no right of appeal from an arbitration.
Arbitrations are at present governed by the Arbitration Act 1996. There is only a limited right of appeal against any award.
So what are the advantages of arbitration?
Firstly, it is consensual, so it can only be pursued with the agreement of all parties. That agreement is usually set out in a binding contract. This does mean that if a dispute flares up one party cannot march off to court, and must submit to arbitration, unless the other parties agree. If they do go to court the other party can get the court to uphold the arbitration clause and freeze the court action until the arbitration has been completed.
Secondly, the parties chose the arbitrator, and if they do not agree there is usually an agreed procedure for using a professional body to appoint a suitable arbitrator. The arbitrator is usually someone who has the necessary legal knowledge, but who is also a technical expert in the area which the dispute is all about.
Thirdly, arbitration is private and confidential. It is therefore particularly suited to parties who need to settle their dispute but who do not want to wash their linen in public.
Fourthly, the arbitration agreement can itself set out the procedure to be followed, and whether the arbitrator can award costs, or perhaps that costs are to be shared equally whatever the outcome. If the parties do not agree on the procedure, the arbitrator may decide how the arbitration will be conducted, having consulted all the parties.
Fifthly, arbitration can be quicker and cheaper than court action, but more often than not the use of lawyers and experts on complex matters does mean that there is often little saving to be made on court actions.
Points to watch
But there are a few disadvantages. An arbitration agreement does not stop a party taking a court action in another member state of the European Union, a point decided by the European Court of Justice in February 2009. So whilst an agreement to arbitrate in an English contract can be enforced in the English courts with a freezing order, it cannot stop a party getting round the arbitration clause by starting court proceedings in another member state.
An arbitration agreement is also subject to the test of reasonableness in consumer contracts. In a 2008 case a builder’s standard terms and conditions with an arbitration clause were found to be in breach of the Unfair Terms in Consumer Contract Regulations of 1999. The arbitration clause had not been drawn to the householder’s attention, and explained to her, and given the high expense of arbitration relative to the value of the claim, there was a significant imbalance in the parties’ rights.
The Arbitration Act and regulations provide that in any event an arbitration agreement for a claim not exceeding £5,000 is automatically unfair. In the case mentioned above the value exceeded £5,000, but the clause was still found to be unfair on general principles. It should also be noted that due to another recent decision of the European Court of Justice any court deciding a dispute involving a consumer must look at the Unfair Contract Regulations even if they have not been asked to do so!
Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
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