To litigate or to arbitrate, that is the question.
The answer, however, is not as straightforward as it might seem for in-house counsel. There are numerous pros and cons to both strategies and there is no cookie-cutter solution. Individual circumstances in one case might call for arbitration, while different circumstances in a similar case might convince one to go to court.
Arbitration is generally considered to be faster, less expensive, and more private than litigation. Court cases, on the other hand, are more structured, tend to rely more on precedence, and can be readily appealed.
In a commercial context, virtually any type of contested contractual agreement can be arbitrated or litigated — mergers and acquisitions, a lease renewal, who’s at fault for a product defect, or a dispute over the delivery of goods and services.
Richard Leipsic, vice president and general counsel for Canwest Global Communications Corp., Canada’s largest private media conglomerate, says privacy is often the most sought-after element through arbitration.
By opting against the court process, parties on both sides can avoid the glaring spotlight that often shines, particularly in high-profile or contentious cases, from media and public access to the proceedings.
He says another often-cited benefit of arbitration is both sides have a certain amount of control over the process and can play a role in setting the ground rules for the proceedings. For example, you can decide whether you want to present to one or three arbitrators. In complicated financial cases, you could include a provision that a specialist, such as an accountant, advises an arbitrator.
“You’re not completely reliant on a judge to have accounting expertise [in arbitration]. It’s not to say you couldn’t have experts present evidence but it would be advantageous to have an accountant as an arbitrator, or as an adviser to the arbitrator, so you can have a better assurance of getting a degree of expertise on the case,” he says.
“If you’re going to court, all you know is you’re going to get a judge.”
Leipsic says many people consider arbitration to be less costly than litigation but he thinks that might be oversimplifying things. Both sides have to pay their own legal fees, the arbitrator’s fee, and rent for the venue. In a trial, the judges don’t charge you, and the courthouse is free.
He says he also doubts that arbitrations are necessarily faster than court cases, as he has seen many arbitrators whose schedules are far more jam-packed than those of judges.
“It’s a coin toss in terms of cost and timing,” he says.
Jonathan Kroft, executive vice president of risk management at Winnipeg-based financial services firm Wellington West Capital, says while most in-house counsel focus on the arbitration-versus-litigation question, an often overlooked element is what should be negotiated into an arbitration clause.
Problems can arise when the clause is drafted during the honeymoon phase and both sides are optimistic about a successful partnership, he says.
“It’s a downer to think about the potential that the relationship is going to go badly. Frequently, the parties are suffering from deal fatigue. They’ve negotiated the deal and the arbitration clause is sometimes put in with little thought. Sometimes it’s boilerplate. [The lawyers] haven’t really examined whether arbitration is appropriate, and if it is, what form of arbitration is appropriate,” he says.
Kroft notes there are also tactical elements to consider before choosing a resolution strategy, such as the relative positions of the parties and the nature of the disputes that are likely to arise. For example, it may not be advantageous for one side to have its dirty legal laundry aired in a courtroom in front of reporters and cameras.
“If they’re sensitive to publicity, and you’re prepared to go to court and they’re not, then you may actually have an advantage in negotiating the terms of the dispute,” he says.
Arbitration also carries with it a certain finality, because such decisions are usually final and can’t be appealed. In court, however, you have no assurance that an appeal will not be filed. It can be a double-edged sword, Leipsic says.
“It cuts both ways. Arbitrators often make decisions where they come to the wrong conclusion but you have to live with it,” he says.
Leipsic says that as global commerce continues to expand, arbitration is increasingly used to settle disputes that cross international borders because neither side wants to rely on the judicial system of the other.
“It’s a growth industry. You’d expect to have more disputes by virtue of the increase in economic activity,” he says.
Kroft says litigation is more of a one-size-fits-all approach, as there are court rules that have to be followed, and the scope for flexibility and tailoring your dispute resolution process is much more limited.
“In a commercial context, it may be that parties say the resolution of a dispute done quickly, cheaply, and privately is more valuable to them than the perfection of the justice,” he says.
Kroft says there are times when a disagreement will end up in court even with an arbitration clause. For example, if two parties join forces to provide a certain service to a third party, a dispute could arise over who is responsible for any damage sustained by the customer.
“Unless they consent to arbitration, you can’t force the third party to arbitrate if they’re not part of the arbitration contract. You end up in court anyway,” he says.
Kroft says it’s important for lawyers to take the time to anticipate what sort of disputes might arise in a commercial transaction and what attributes of arbitration are advantageous or problematic in each individual case, he says.
Angela Avery, senior solicitor at Calgary-based ConocoPhillips Canada, the third biggest producer of oil and gas in the country, says she thinks the bloom has largely come off the arbitration rose in the last 15 years.
“Everybody used to be really keen on arbitration and thought it was the panacea for business disputes. That view has changed over time; people are more skeptical that it is so far superior to litigation,” she says.
Avery says lawyers used to prefer arbitration because it seemed like an expedited process where you could avoid lengthy and unhelpful discovery. Unfortunately, if you don’t have a properly agreed-upon arbitration process, you can end up doing just as much or more discovery, she says.
“If the rules are silent or you haven’t agreed to rules, the arbitrator can act just like a court in ordering just as much production as you’d typically have [in court] anyway,” she says.
Avery says it can be difficult to find arbitrators in the oil and gas sector, particularly if you’re looking for a panel of three with sufficient expertise.
She says if you have the stronger case and you’re confident you can get an impartial arbitrator, her preference is a panel of one.
(Arbitrators are usually retired judges, but it’s not uncommon for retired lawyers to arbitrate cases. People in both professions understand the rules of engagement.)
“Three is administratively more challenging. Oftentimes the chair is selected by the stronger arbitrator, so if you pick the weaker arbitrator it’s kind of stacked against you already,” she says.
Avery says the time and cost savings are often a red herring in arbitration because litigation often settles the issues the arbitrator is entitled to decide.
“You could be in court for years determining what the arbitrator can decide before you go back to the arbitration,” she says. IH