Commercial Arbitration: What Is It, Types & Benefits
What is Commercial Arbitration?
Commercial arbitration is a method for resolving business disputes. Unlike traditional court litigation, arbitration offers a private, streamlined, and often more efficient way to handle company conflicts.
Corporate arbitration can address a wide range of disputes, from breaches of contract to complex financial disagreements.
This quick guide explores international commercial arbitration, including its definition, process, advantages, and comparisons to other dispute resolution methods.
An overview of international commercial arbitration
In commercial arbitration, disputing businesses agree to submit their quarrel to one or more neutral arbitrators.
The arbitrator (or panel of arbitrators) considers the arguments, examines the evidence, and then makes a binding award. An arbitration agreement – which is a contract between the parties – governs the process.
Who are commercial arbitrators?
Once a dispute arises and the parties agree to the commercial arbitration process, they select one or more arbitrators. These arbitrators are usually experts in the relevant field and are chosen based on their expertise and neutrality.
What is the legal seat?
The legal seat refers to the jurisdiction or location whose procedural laws will govern the arbitration proceedings. Jurisdictions with well-established arbitration laws provide more predictability and support for the arbitration process.
While London remains the world’s preferred choice for international arbitration, other regional arbitration centres – particularly in Asia – have grown in popularity (Financier Worldwide).
The Arbitration Bill aims to preserve London’s status as the preeminent seat for international arbitration. Following the 2024 general election, peers backed the rapid passage of the Arbitration Bill through Parliament. (Legal Futures).
The international commercial arbitration process
Arbitration offers a structured yet flexible approach that can be tailored to the needs of the parties involved.
Here is a quick overview of the key stages in the commercial arbitration process:
The commercial arbitration agreement
The process begins with an arbitration agreement. This specifies the arbitrators, the legal seat, the language to be used, the legislative framework, the parameters for the award, and anything else that might be relevant.
Pre-hearing procedures in commercial arbitration
The parties may engage in pre-hearing procedures, including the exchange of documents and evidence. This phase is typically less formal than court litigation and is designed to streamline the process.
Unbiased arbitration hearing
During the hearing, both sides present their case. The arbitrators listen to both parties and may ask questions to clarify the issues. Some hearings occur on paper, while others require both parties to attend in person.
Deliberation and binding arbitral award
After the hearing, the arbitrators deliberate and issue an award. This award is binding and enforceable in the same manner as a court judgment. There is no fixed or average amount for commercial arbitration awards.
Advantages of commercial arbitration
- Confidentiality: Unlike court proceedings, arbitration hearings are private, and the results are not disclosed to the public. This is particularly beneficial for businesses that want to protect sensitive information and maintain their reputation.
- Speed and efficiency: The streamlined procedures and the expertise of arbitrators often result in quicker resolutions, allowing businesses to move forward without prolonged disruptions.
- Flexibility: Parties have greater control over scheduling, procedural rules, and the selection of arbitrators. This flexibility can make the process more accommodating to the specific needs of the parties involved.
- Expertise: Arbitrators are often chosen for their expertise in the dispute subject matter. This specialised knowledge can lead to quicker, more informed decisions, and a fairer outcome.
- Cost-effectiveness: Commercial arbitration is often more cost-effective than litigation due to the reduced time frame and streamlined procedures.
- Enforceability: Arbitration decisions cannot be challenged except in very specific and limited circumstances.
Criticisms of commercial arbitration
- High costs: While arbitration can be cost-effective compared to traditional litigation, it can be expensive, particularly in complex cases with multiple arbitrators and extensive proceedings.
- Limited appeal options: The finality of arbitration awards, with limited grounds for appeal, can be a disadvantage if a party believes the decision was unjust or flawed.
- Inconsistent decisions: The flexibility and lack of formal precedent in arbitration can result in inconsistent decisions in similar cases.
- Enforcement. While arbitration awards are generally easier to enforce internationally than litigation, the process can still be complicated.
- Limited remedies. Some legal remedies, while available in court, may not be within the authority of arbitrators.
Types of commercial arbitration
Arbitration can take several forms. Understanding the different types of commercial arbitration helps businesses choose the most suitable approach for resolving their disputes.
- Institutional arbitration: the global standard for business disputes
International arbitration deals with disputes involving parties from different countries. Treaties and international rules govern the process. It is particularly important in global commerce, where cross-border disputes are common. - Ad hoc arbitration: greater flexibility and choice
In ad hoc commercial arbitration, the parties design their own procedures without the involvement of an administering institution. This can offer greater flexibility but may lack the same level of support and resources provided by institutional arbitration. - International arbitration for cross-border commercial disputes
International arbitration deals with disputes involving parties from different countries. The process is governed by treaties and international rules. It is particularly important in global commerce, where cross-border disputes are common.
Enforcement of commercial arbitration awards
One of the strengths of commercial arbitration is its enforceability. Under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, arbitration awards are recognised and are now enforceable in over 160 countries.
This provides a significant advantage for businesses engaged in international trade, as it ensures that arbitration awards have global reach and enforceability.
Alternatives to commercial arbitration
When businesses face disputes, they have several resolution options besides commercial arbitration.
Each alternative has pros and cons, and companies should consider these carefully when deciding on the most appropriate approach.
Here are the primary alternatives to arbitration:
- Traditional court-based litigation for commercial disputes
Litigation is the process of resolving disputes through the court system. It involves filing a lawsuit, going through a trial, and obtaining a judgment.
Some companies prefer commercial litigation over arbitration because arbitral tribunals lack inherent power or jurisdiction. Companies may also avoid arbitration due to its final and binding nature, preferring the procedural safeguard of an appeal available in court. - Mediation as an alternative dispute resolution method
Mediation involves a neutral third party, the mediator, who helps the disputing parties negotiate a mutually acceptable agreement.
The mediator does not impose a decision. However, mediation is non-binding unless a settlement is reached and formalised, and it may not resolve the dispute if parties cannot agree. - Negotiation for cost-effective commercial disputes
Negotiation is the direct discussion between the parties involved in a dispute to reach a mutually satisfactory agreement without third-party intervention. Negotiation is cost-effective and straightforward and preserves relationships by avoiding adversarial processes.However, it may not be effective if parties are unwilling to compromise. The lack of formal structure can also lead to prolonged discussions without resolution.
Contact our commercial arbitration lawyers today
At Summit Law, we have extensive commercial arbitration experience and strive to make the process as simple and stress-free as possible.
We can help draft arbitration clauses in new commercial contracts, advise on the appointment of arbitrators, and steer you through the arbitration process to ensure the best possible outcome.
For your free consultation, contact our arbitration lawyers today on 020 7467 3980 or complete the enquiry form on this page.