The rise of arbitration in international disputes

What is international arbitration?

The rise in globalisation has led to a stark rise in arbitral proceedings throughout the 21st century. With the onset of the pandemic, international disputes are likely to increase further, with the London Court of International Arbitration (LCIA) receiving a record number of cases in the first quarter of 2020.

In 1985, René David described arbitration as follows : “Arbitration was mainly conceived of in the past as an institution of peace, the purpose of which was not primarily to ensure the rule of law but rather to maintain harmony.”

Even towards the end of the 20th century, it is possible to see from this comment how the trend of modern international arbitration rose so steeply. International arbitration allows parties to settle a dispute out of court, in a manner that best suits each party.

This article takes the reader through the rise of arbitration in international disputes, with a particular focus on the current pandemic and the climate of 2020 to 2021.

Arbitration vs litigation in 2020 - 2021

Generally, the rise of international arbitration cases over the last few decades can be attributed to a comparatively cost-effective, private and flexible way of solving a dispute when compared with the alternative: litigation.

Privacy

A distinct advantage of arbitration is that it is held in a private setting. That being said, privacy is not absolute, as information about the dispute could still be published or otherwise leaked.

Particularly in the age of social media, where information (and not necessarily the right information) can spread so quickly, companies may sometimes find that the best option is to set the record straight publicly. As such, litigation could be favoured in more high-profile cases, or at the very least, parties could both consent to publishing certain aspects of the award.

Cooperation (or lack of)

With court-mandated deadlines and stricter rules all round, it is very difficult for either party involved in litigation to be uncooperative, which is really the point of litigation.

Arbitration is a form of alternative dispute resolution that requires a lot more cooperation from both parties. Unfortunately, the nature of dispute resolution (as any married person will be aware!) is that it involves two or more parties in disagreement. This can be difficult to manage without court-mandated systems in place to ensure that parties stay on track.

Particularly with international arbitration, the opposing party is more likely to agree to international arbitration, than consent to trial in the home country of the other party. Arbitration can fulfil a huge role in levelling the playing field.

Flexibility

In a post-COVID world, arbitration has some distinct advantages. The flexibility of arbitral proceedings means new approaches can be adopted quickly, minimising the need for in-person contact and international travel.

The pandemic has also caused a backlog in litigation cases requiring space in the UK’s courts. 89% of the LCIA’s arbitration cases were held in England in 2019, and of course, none of these needed to wait for any courts to become available.

The flexibility and speed that arbitration allows, could be a compelling reason for further international disputes to be settled through arbitration.

Precedents and international arbitration

An important aspect of litigation is that parties can point to previous cases and their rulings, then use those to achieve a suitable result in their case. This can be useful especially if similar disputes have come up before, as it can speed up the litigation process.

In arbitration, the award does not form a binding precedent. This can be an advantage, particularly if the parties (or one party) is hoping for a different outcome to a previous, similar case.

The rise in international arbitration cases could have an interesting side effect on precedent. By removing more cases from the public record, the supply of precedent to the legal system is diminished.

This could have a particular impact on 2020 to 2021 litigation cases, as new disputes relating to the pandemic will potentially have fewer precedents to rely on.

Evidence

In arbitration, parties (and/or the arbitrator) can establish their own rules for the admission of evidence as part of the arbitral process. This is a major advantage in international disputes, as different countries may have different standards for allowing evidence to be used in court. In litigation, the rules as to what can be used as evidence are much tighter.

Cost of international arbitration

Most international arbitration cases will almost always be cheaper than cross-border litigation. However, there are still many similar costs involved with arbitration as in litigation, such as hiring a solicitor, booking a venue and paying the arbitrator’s fees.

In smaller disputes that could be resolved quickly in court, litigation can occasionally be a more cost-effective option.

Decisions

With arbitration, in some cases, if neither party likes the award, they don’t have to agree to it. If the whole dispute then ends up in court anyway, it could be said that it would have been more straightforward and cost-effective to have gone down the litigation route in the first place.

Litigation, for better or worse, ensures that there is a legally binding decision in place every time. There will, for better or worse, be a decision made, whether both parties like it or not.

Arbitral awards (decisions) generally are enforceable internationally, under the New York Convention. As of August 2020, 166 countries have agreed to enforce cross-border arbitral awards, meaning that if the dispute affects multiple countries, the award tends to be easier to enforce than judgments of one particular country’s courts.

Appeals

Based on new cases, the LCIA has reported a consistently low number of challenges to arbitral awards; placing the figure at around 2% each year in the last five years.

Both an advantage and a disadvantage of arbitration, there are very limited avenues for appeal. Often, the right to appeal can be waived as part of the arbitral agreement. In litigation, there is a clear course of action, often with an opportunity to appeal.

The rise of international arbitration

In the first quarter of 2020, the LCIA saw a spike in new cases and predicts that the COVID-19 crisis will undoubtedly lead to additional cases.

In 2019, the LCIA had a record number of 406 cases referred, including 346 arbitrations under the LCIA Rules, the highest number ever received.

English law remained the most frequently chosen law, governing 81% of arbitrations administered under the LCIA Rules, reflecting its importance in international trade.

Types of disputes in international arbitration

The four most common disputes seen in arbitrations under the LCIA Rules in 2019 were:

1. Loan or other facility agreements (30%)
2. Services agreements (19%)
3. Sales of goods (18%)
4. Shareholders’ agreements, share purchases and joint venture agreements (14%)

The least common types of dispute were:

1. Employment (1%)
2. Intellectual property (1%)
3. Partnership (1%)
4. Shipbuilding (1%)
5. Other (3%)

The benefits of arbitration when dealing with international disputes

In summary, the benefits of arbitration when dealing with international disputes in particular are the following:

• Awards are enforceable across the world, in almost 170 countries
• The arbitral seat can be chosen, as well as the law of a certain country
• Arbitration can be quickly adapted, meaning that it’s well-suited to cross-border disputes even when international travel or in-person contact isn’t permitted
• Nationalities of the arbitrator (or tribunal) can be varied, allowing for less bias in international cases
• Parties can establish their own rules for the admission of evidence, as part of the arbitral process
• Arbitration is often quicker than litigation, particularly following any backlog in court cases in the wake of a pandemic