Every comprehensive commercial agreement, whether between domestic or cross-border entities, should include terms governing the process the parties will use to resolve disputes arising under the agreement. An agreement may provide that disputes will be resolved by litigation in a court of competent jurisdiction or by arbitration. Because litigation and arbitration differ significantly in procedure, the dispute resolution provision must address different issues.
Litigation is conducted within a judicial system governed by established procedural statutes, rules, and regulations, as interpreted in judicial decisions. Parties have an extremely limited ability to alter procedural rules by agreement. Parties may select the law of a particular jurisdiction to govern their agreement (a governing law clause) and specify the forum in which their dispute will be heard (a forum selection clause). The judicial process in the state and federal courts of the United States provides each party with broad ability to discover, before trial, the opposing party's documents and information, which may yield evidence to support claims or defenses. Discovery may also uncover evidence that supports additional claims or defenses. A court order or judgment can be appealed to an intermediate appellate court or to the highest court in the jurisdiction. Judges are assigned randomly, and other than filing fees and similar charges, the parties do not pay for the use of the court system. With limited exceptions (such as trade secrets), documents filed in state or federal court in the United States are publicly available. Finally, litigation can be time-consuming and costly.
Arbitration is an alternative to litigation in the courts. It generally provides a quicker resolution of disputes because it does not require the formality and detailed pre-hearing and trial procedures that courts demand. Further, arbitration is conducted on a confidential basis. However, arbitration can also become time-consuming and expensive if the parties agree to conduct discovery on a scale similar to judicial discovery. Arbitration is conducted by for-profit entities that employe and train attorneys or former judges to preside over disputes. Parties must pay arbitrators’ fees. In the United States, arbitrators are typically compensated on an hourly basis. Unlike a court judgment, an arbitration award can be appealed only in very limited circumstances. This is the most significant limitation of arbitration, which we will address in our next article.
Because arbitration is based on the agreement of the parties, the parties have the right — and should exercise it — to carefully negotiate the process governing their arbitration. First, the parties should establish the scope of issues subject to arbitration; any dispute falling outside that scope should be resolved through litigation. Given the limited right to appeal an arbitration award, issues fundamental to a business — such as the ownership of intellectual property rights — are often better resolved through litigation.
Parties have the right — and should exercise it — to tailor many procedural aspects of arbitration. What parties most often fail to address is the law that should govern the arbitration process itself. Parties typically select the law governing their substantive contractual rights, but they should also consider whether a different jurisdiction's law might better suit the arbitration procedure. Parties should also agree on the arbitral institution, the rules that will govern the proceedings, and the number of arbitrators, their qualifications, and the selection process. It is important for each party to understand the institution's rules and fee structure, as these can significantly affect the process. Parties can also choose the language of the arbitration. Further, parties should carefully consider what evidence they will need to prove their claims or defend against them, and negotiate a scope of discovery that may differ from the institution's default rules. Absent agreement on specific procedural rules, the parties are bound by the default rules of the arbitration service provider, which typically limit pre-hearing discovery and evidence-gathering compared to judicial proceedings.