Whilst both mechanisms ultimately seek to achieve resolution of disputes, they differ significantly in procedure, cost, speed, confidentiality and flexibility. There are also certain disputes which, by their very nature, are not arbitrable. Examples include divorce proceedings and administrative-law reviews instituted against organs of state.

Understanding these differences is essential when parties negotiate their contractual relationship.

What is Arbitration?

Arbitration is a private alternative dispute resolution process in terms of which parties agree that disputes arising from their contractual relationship will be resolved by arbitration, rather than through our traditional court process. 

The agreement to arbitrate is usually incorporated into a contract at the outset of the commercial relationship. Arbitration is therefore fundamentally consensual in nature. Unless parties have agreed to arbitration, a dispute cannot ordinarily be resolved through such process. Conversely, where parties have agreed to arbitration, they will generally be required to resolve their disputes through that process, rather than through our courts.

Where no arbitration agreement exists, disputes must generally be resolved through the ordinary court process, which can often take considerably longer to reach finality.

One of the defining features of arbitration is that the dispute is determined by an independent arbitrator appointed by the parties. Depending on the terms of the arbitration agreement concluded between the parties, the arbitrator’s award may either be final and binding or subject to an appeal process. Once the initial arbitration and any applicable appeal process are finalised, an arbitration award can be made an order of court to be enforced in the same manner as a court judgment.

Arbitrators as Specialist Decision-Makers:

One of arbitration’s most significant advantages is the ability of the parties to appoint an arbitrator with specialist knowledge and experience relevant to the dispute. Commercial, engineering, construction and infrastructure disputes are often technically complex. In arbitration proceedings, parties can jointly appoint an arbitrator with the necessary expertise, who understands the industry and has the necessary knowledge of the technical issues and commercial realities underpinning the dispute. The availability of an appropriately qualified arbitrator to hear the matter on an expedited basis may also be a significant advantage where urgent resolution is required.

Confidentiality of Arbitration Proceedings: 

One of arbitration’s greatest attractions is the private and confidential nature thereof. Court proceedings are generally open to the public and pleadings, affidavits, witness testimony and judgments become part of the public record, all of which can potentially be accessed by competitors as well as the media. Arbitration proceedings, by contrast, are conducted privately. This makes arbitration particularly attractive where disputes involve commercially sensitive information such as pricing methodologies, product designs and trade secrets.

Flexibility of Arbitration:  

The rules governing our traditional court process are well established and provide litigants with a clear procedural framework that must be complied with before a matter will be regarded as being trial-ready. Where a party fails to comply with such rules, the opposing party may approach the court for assistance by way of an application to compel. Such applications are often time-consuming and invariably result in delays to the finalisation of the matter.

With arbitration on the other hand, parties enjoy considerable freedom to determine their own rules and procedure governing the arbitration process to be implemented. Procedural timetables and hearing dates are often tailored to suit a specific dispute and the urgency thereof. Pre-arbitration meetings are commonly held to establish procedural directions and to ensure that the matter progresses efficiently, with the continued involvement of the arbitrator. In addition, arbitrators are generally able to deal with interlocutory procedural issues on an expedited basis, thereby reducing unnecessary delays.

Speed of Arbitration Proceedings:

Unfortunately, the court rolls are heavily congested, and it is not uncommon for litigants to wait several years before a trial date is allocated and a dispute is ultimately resolved. In addition, parties are required by somewhat newly published court directives to participate in mediation processes before a trial date will be allocated. 

Whilst mediation undoubtedly serves an important purpose, there are instances where disputes have become so entrenched by the time litigation is commenced that the prospects of a successful mediation are negligible. In such cases, the compulsory mediation process may result in further delays and additional costs being incurred before the dispute can ultimately proceed to trial.

Arbitration therefore provides a more expeditious mechanism to resolve commercial disputes than traditional court litigation, as it allows parties greater control over regulating their own processes. Compared to traditional litigation, disputes referred to arbitration are normally actively managed by the parties and can potentially be resolved within months. 

The hearing process itself can also be streamlined. For example, parties may agree that the so-called evidence-in-chief of witnesses, including that of experts, will be presented by way of written witness statements, thereby reducing the time required for oral evidence.

More generally, the arbitration process is designed to ensure that the real issues in dispute are identified and determined as efficiently and expeditiously as possible. It is also not uncommon for hearings to be postponed, sometimes at short notice, for a variety of reasons. 

Such postponements during our traditional court process can result in significant delays before a new trial date is allocated. In arbitration proceedings the parties enjoy far greater control over the scheduling of hearings. Should a hearing not be finalised within the allocated period, or should a postponement become inevitable, the parties and arbitrator are often able to immediately identify suitable dates for the hearing to recommence. 

Cost of Arbitration Proceedings: 

Perhaps the most significant disadvantage of arbitration is the cost associated with the process. Unlike judges who oversee matters in our traditional court process, arbitrators are privately appointed by the parties and charge professional fees for their services. In addition, the parties are generally required to bear various administrative costs associated with the arbitration such as venue hire and transcription services. 

It has become common practice in arbitrations for the costs to be initially shared equally between the parties during the proceedings. This arrangement ensures that the arbitration can proceed efficiently while preserving the arbitrator’s authority to make an appropriate costs award at the conclusion of the matter. Accordingly, a successful party will generally be entitled to recover from the unsuccessful party a substantial portion of the arbitration costs it has incurred throughout the process.

Difficulties do however arise where one party fails to pay its agreed share of the arbitration costs. In such circumstance, the other party will be required to fund all the costs associated with the arbitration to allow the process to proceed. Although such amounts may ultimately be recoverable through a favourable costs award, the successful party will nevertheless be required to carry the full financial burden pending the final determination of the dispute.

A further consideration is that additional steps may be required to enforce the award should the unsuccessful party fail to comply therewith voluntarily. In such circumstances, the successful party will generally be required to approach the High Court to have the award made an order of court before the ordinary processes of execution can be implemented. 

Although this is ordinarily a relatively straightforward process, it nevertheless results in additional costs being incurred and may add several months to the overall dispute resolution process. Whilst arbitration still provides a faster route to obtaining a final determination of a dispute, the enforcement of an award may still require some degree of court involvement.

Which option is better?

There is no universal answer to this question.

In the case of high-value commercial agreements involving fact-intensive disputes, confidentiality concerns, technical subject matter and a need for the relatively expeditious resolution of disputes, arbitration is often the preferred dispute-resolution mechanism. Conversely, where a dispute may require the exercise of extensive judicial powers or the granting of urgent relief, court proceedings may be the more appropriate mechanism to resolve a dispute. 

The optimal choice will ultimately depend on the nature of the dispute, the financial means of the parties involved and the practical considerations relevant to the resolution of the dispute. Factors such as the value of the claim, the complexity of the issues in dispute, the need for confidentiality, urgency and the parties’ ability to fund the chosen dispute-resolution process will all influence whether arbitration or traditional court litigation is the more appropriate option.

Conclusion:

Alternative dispute-resolution provisions are frequently overlooked during contract negotiations, only becoming significant once a dispute has arisen. By that stage, the parties are generally bound by the choices they made, or failed to make, at the time of contracting.

Careful consideration should therefore be given to whether arbitration or court proceedings will best serve the parties’ commercial objectives and anticipated dispute-resolution needs. A properly drafted alternative dispute-resolution clause can significantly enhance the parties’ ability to resolve future disputes in a manner that is efficient, confidential and tailored to the particular requirements of the transaction, albeit often at a greater cost in the case of arbitration.

Ultimately, the most effective dispute-resolution clause is one that reflects the commercial realities of the transaction and anticipates the nature of the disputes that may arise in the future.