Pros And Cons Of Arbitration

Summary

• Arbitration is an alternative dispute resolution process in New Zealand where an independent arbitrator makes a final, binding, and enforceable decision; it offers advantages including confidentiality, flexibility in selecting an arbitrator with relevant expertise, speed, and potential cost-effectiveness compared to litigation.
• Key disadvantages include limited appeal rights (restricted to narrow grounds such as lack of jurisdiction or serious procedural irregularity), potentially higher upfront costs including arbitrator fees and venue hire, and reduced flexibility compared to mediation as the arbitrator is bound by applicable law.
• An effective arbitration clause should identify the administering institution, include clear timeframes for each stage, and consider a tiered dispute resolution process requiring negotiation before arbitration is triggered, to reduce costs and avoid ambiguity.
• This article is a plain-English guide to arbitration as a dispute resolution method for New Zealand businesses, prepared by LegalVision, a commercial law firm.
• LegalVision specialises in advising clients on commercial disputes and alternative dispute resolution.

Tips for Businesses

Review your existing contracts to confirm whether they contain arbitration clauses and whether those clauses are clearly drafted. If drafting a new clause, name the administering institution, set clear timeframes for each procedural step, and consider including a tiered process requiring negotiation before arbitration is triggered. When selecting an arbitrator, prioritise relevant industry expertise, particularly in technical or complex disputes.

An efficient dispute resolution process is an essential consideration for your business. For many New Zealand businesses, arbitration may be a suitable alternative to traditional court litigation. But is it the right choice for your business? This article explores the advantages and disadvantages of arbitration. This will help you decide on your business’ dispute resolution strategy. 

What is Arbitration?

Arbitration is an alternative dispute resolution process where disputing parties elect to refer a dispute to an independent arbitrator to make a binding decision. The arbitrator’s determination is a final and enforceable decision imposed on the parties. Compared to mediation and negotiation, this process follows stricter procedural rules and processes. 

Key Steps in Arbitration 

Typically, arbitration will involve the following steps:

1. agreeing on an Arbitrator and executing an arbitration agreement;
2. electing whether to hold an oral hearing or make the decision solely from your documents;
3. submitting your claim or if you are the respondent, your defence and, if applicable, your counterclaim;
4. the claimant’s reply to the respondent’s defence. You should note that a respondent has no right of reply to the claimant’s reply;
5. both parties provide discovery evidence to support their claim or defence;
6. an oral hearing where you present your claim or response (if applicable); and
7. a determination and award by the arbitrator.

Advantages of Arbitration

1. Confidentiality and Privacy

One of arbitration’s most compelling benefits for businesses is confidentiality. Unlike court proceedings, which are generally public, arbitration allows your business to keep out of the public eye:

• sensitive information;
• trade secrets; and
• reputational issues, 

This privacy can be crucial for maintaining business relationships, your reputation and market position.

2. Flexibility and Control

Arbitration offers your business some control over the dispute resolution process. You will have the ability Arbitration offers your business some control over the dispute resolution process. You will have the ability to agree or provide an opinion on:

• selecting an Arbitrator with relevant industry expertise;
• setting a timeline for proceedings;
• determining whether to conduct an oral hearing or have the decision made based solely on the submitted documents; and
• the applicable rules and procedures.

It is worth noting that the degree of flexibility can vary depending on the arbitration rules and any prior agreements between the parties.

3. Expertise in Complex Business Matters

You can choose arbitrators with specific industry knowledge or technical expertise in complex commercial disputes. For instance, in a construction dispute, you might select an arbitrator with practical and knowledgeable expertise in the construction industry. This specialised knowledge can lead to more informed decisions over the dispute and potentially create a more balanced outcome.

4. Speed and Efficiency

Time is money in business, and arbitration often resolves faster than litigation. While litigation can drag on or be delayed, many arbitrations are completed within months. This efficiency can help your business move forward quickly, minimising disruption to operations and business relationships.

5. Cost-Effectiveness

Although not always cheaper, this can be more cost-effective for your business in the long run. The streamlined process and ability to set deadlines often translate to lower legal fees. Moreover, the finality of arbitration decisions (with limited grounds for appeal) can prevent costly litigation.

Disadvantages for Businesses

1. Limited Appeal Process

The finality of arbitration can be a double-edged sword for businesses. While it provides certainty, it also means that if you disagree with the arbitrator’s decision, your options for appeal are minimal. In New Zealand, challenges to arbitration awards are restricted to narrow grounds, such as lack of jurisdiction or serious procedural irregularity.

2. Potential for Higher Upfront Costs

While arbitration can be cost-effective overall, you should be prepared for potentially higher upfront costs. You will typically need to pay for the arbitrator’s time, administrative fees, and venue hire. These costs can be substantial in complex cases or those requiring multiple arbitrators.

3. Less Flexibility Than Other Alternatives

Unlike mediation and negotiation, an arbitrator takes the decision-making power and determines the outcome of your dispute. Although this has benefits, you do not have as much control over the outcome. Compared to mediation, an arbitrator is confined by legislation, limiting their ability to devise flexible solutions outside the applicable laws.

4. Challenges in Multi-Party Disputes

Arbitration can sometimes be less effective for complex business disputes involving multiple parties. Consolidating multiple arbitrations or ensuring consistent decisions across related disputes can be challenging.

Is Arbitration Right for Your Business?

When deciding whether to use arbitration, consider the following points:

1. what does your agreement dispute resolution clause provide for?;
2. the nature and complexity of potential disputes in your industry;
3. your business needs for confidentiality and some control over the process;
4. the importance of speedy resolution;
5. your willingness to accept limited appeal rights; and
6. whether you need industry expertise.

Drafting an Effective Arbitration Clause

If you decide arbitration is appropriate for your business, ensure your agreement provides for an arbitration clause. A poorly drafted clause can create uncertainty about how the parties should conduct the dispute resolution process.

If you elect arbitration, you should identify whether you want a specific institution to administer the arbitration and, if so, name it in the clause. For example, New Zealand Dispute Resolution Centre or the AMINZ. This includes a tiered dispute resolution clause that requires negotiation before arbitration is triggered can also reduce costs by resolving lower-stakes disputes without formal proceedings.

Key Takeaways 

Arbitration provides businesses a confidential and potentially faster alternative to traditional court litigation. It allows for selecting arbitrators with specific industry expertise, which can be particularly beneficial in complex disputes. While often cost-effective in the long run, arbitration may involve higher upfront costs and offers limited options for appeal. The decision to use arbitration should be carefully considered, and you should weigh factors such as the nature of the disputes, the need for confidentiality, and the importance of maintaining business relationships. Ultimately, arbitration can be a valuable tool for dispute resolution, offering a balance of control, expertise, and efficiency for many business situations.

LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced disputes lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. 

Frequently Asked Questions

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.