by Nicholas P. Connon and Robert A. De By*
At an American Bar Association/Los Angeles County Bar Association meeting on international arbitration last year, one of the speakers took the position that he preferred international litigation over international arbitration. It was a surprising and slightly discordant position because of the venue.
But because it came from in-house counsel, the sentiment expressed needs serious consideration. Are there valid reasons why a client should prefer international litigation over arbitration? And if so, what are they and under what circumstances do they apply?
Experience shows that the number of cases in which the parties agree to a submission clause and thus opt for arbitration after the dispute has arisen is, relatively speaking, very small.
Even smaller is the number of cases where there is an arbitration clause but both parties agree, nevertheless, to go to court.
And virtually nonexistent are cases where there is an arbitration clause but one of the parties succeeds in litigating the matter against the wishes of the other party.
Accordingly, the choice whether to litigate or arbitrate in international matters is rarely if ever available once the dispute has arisen. As a result, meaningful choice between these two options needs to be made at the contracting stage by either agreeing to an arbitration clause, or by leaving the matter subject to international litigation if a dispute were to arise during the parties' relationship.
The underlying reason why this particular in-house counsel preferred international litigation over arbitration is the often-heard lament that arbitration and arbitrators are getting slower and more expensive.
Assuming for argument’s sake that this is true, the question is whether litigating instead will make the process any faster or cheaper. And even so, is what has to be given up to gain speed and save costs worth it? Another reason the in-house attorney at the seminar gave for his preference to litigate is that the resulting judgment would be easier to enforce overseas than an arbitration award.
Let’s assume for this article a complicated, high-value dispute typically found in international arbitrations between parties in countries whose legal systems differ significantly. Let’s see how it may fare in a foreign court compared to an international arbitration.
Investigating the dispute, gathering the facts, and reviewing the evidence in the possession of one’s client and interviewing friendly witnesses is unlikely to be all that different whether one prepares for an international arbitration or for litigation abroad. But while there may be few savings as to time, nevertheless legal rates differ significantly depending on the country where counsel is located. Arguably, there may be some cost savings because of lower counsel fees.
Few clients, however, would feel comfortable dealing directly with counsel in a foreign or even exotic location. Besides language problems, there will be significant cultural and legal differences that need to be bridged.
Most clients would be well advised and served by dealing with counsel in their own country who has experience in the international arena even when litigating abroad. If the client opted for international arbitration, such counsel would suffice, while if it were to engage in litigation abroad the additional cost of foreign counsel—even at a potentially lower rate—would increase rather than decrease costs.
Is there then, perhaps, something to be gained time-wise by litigating abroad? Are foreign court proceedings quicker than international arbitration?
While it would in large part depend on the country’s court system, there are no doubt countries in which this is true. Such gains in speed, however, are most likely to be the result of streamlined proceedings that do away with some of the procedural aspects found in international arbitrations.
The Big Decision
The Goal: Settling an age-old settling question.
The Inquiry: How do you really know whether an arbitration tribunal or court litigation is best for your high-stakes commercial matter?
The Solution: The authors have devised a checklist. Score it, and your choice or your client advice will be much better.
For example, many foreign jurisdictions do not have any discovery. And while international arbitration provides far more limited discovery than would a U.S. court—albeit under the name of disclosure—rare is the international arbitration where the parties are not allowed to obtain any documents from their opponents.
Thus, insofar as the foreign litigation is faster for this reason, a client would not gain much if it came at the expense of obtaining necessary evidence from the other side.
Similarly, many foreign jurisdictions do not allow counsel to directly question or cross-examine opposing witnesses. While this too may make a foreign litigation quicker than an international arbitration where such is generally allowed, again such gains in speed come at significant cost.
One characteristic that virtually all court systems across the world share is that, besides some relatively minor filing fees, the proceedings and the court’s involvement are free.
Arbitrators are not. There is no denying that the arbitrator’s fees can be substantial and that litigating abroad may save costs in that regard. As is always the case when choices are made, however, the question here is whether quality and experience of the judiciary in the country where one would have to litigate is sufficient for the particular matter.
In addition, it is important to answer whether the option to choose one of the arbitrators and the experience and expertise the arbitration panel brings to the case merit the extra costs. One could easily imagine countries and cases for which this is true, and equally those for which it is not. Accordingly, whether arbitrators’ fees are warranted will depend on where the alternative foreign litigation will take place.
No doubt enforcement of a judgment in the country where it is rendered is cheaper and easier than enforcement of an international arbitration award. This is true even if the country where enforcement is sought is a member of a relevant convention, such as the New York Convention, formally known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
This could be an area where choosing litigation over international arbitration results in cost savings. But given that most arbitration awards are complied with voluntarily, such an advantage is likely to be minor in most cases.
Another characteristic that all foreign legal and court systems have in common is that they are far more familiar to one’s opponents. As a result, choosing to litigate abroad by necessity entails giving away the “home-court” advantage.
Moreover, such a choice entails giving up any advantages particular to international arbitration. For example, international arbitrations are a compromise between the characteristics found in the parties’ respective home countries—procedurally speaking as well as when it comes to the applicable evidence rules (often chosen by the parties on an ad hoc basis or by opting for the International Bar Association Rules of Evidence).
And while in an arbitration the parties can agree on the language in which those proceedings will be conducted, the language of a foreign court proceeding is virtually always foreign. That means that both testimony and argument will be in a foreign language and that the client and at least some witnesses—most likely on the client’s side—will need to participate by way of an interpreter.
In summary, while some cost and time savings may be gained by choosing to litigate abroad rather than to arbitrate, they do come at a cost. Whether it is worth it will depend in large part on the country where such foreign litigation is to take place.
The more foreign the jurisdiction is to a party, the higher the costs of any savings in time or expense. As a result, it seems that one rule one can draw in this area is that the attractiveness of international arbitration, as opposed to foreign litigation, increases depending on how different and unfamiliar the alternative, foreign court system is.
Another conclusion that seems warranted is that where the alternative is to litigate abroad in the country whose legal system is similar to one’s own, and legal proceedings there are faster or cheaper than a comparable international arbitration, the alternative to litigate abroad may become more attractive.
Clients should consult with counsel with significant experience in both international litigation and arbitration in order to decide which dispute resolution mechanism is more appropriate to their particular case. In doing so, the following checklist may be of some help. For each category, assign a score of one to 10, with five being neutral. An average score above five means arbitration is the preferred path to resolution:
*Nicholas P. Connon is the managing partner of Connon Wood LLP** and chair of the firm’s Middle East Practice Group. He is based in the Los Angeles office, and has extensive experience in international litigations. Robert A. de By, based in the firm's London office, is chair of the International Arbitration Practice Group and has represented numerous domestic and international clients in international arbitrations, litigations, and mediations concerning complex cross-border contractual, business, investment and other major multi-jurisdictional disputes. They also are the authors of the website www.GlobalArbitrationLawyers.com.
**At the time of publication, the firm was known as Connon Wood Scheidemantle LLP.
Copyright © 2012 Alternatives to the High Cost of Litigation, Vol. 30, No. 3, March 2012.
Disclaimer: This article is for informational purposes only.
Nothing in this article can or should be regarded as legal advice or a substitute for legal counsel.