Introduction
Trading often involves complicated problems during a commercial contractual relationship. Therefore, it is possible that a legal dispute can arise in international trade transactions. Despite that, the construction of the contract must be made carefully, a prudent exporter has to prepare for a contemplative act which can be taken in the case of breach of contract by the buyer. In such cases, the exporter may prefer to find an effective and quick solution for his dispute rather than resorting to litigation, which may cost him much more time and effort. Arbitration is the common method of settling the kind of disputes which are related to commercial contracts.1
However, given that there are two different mechanisms of settling disputes, arbitration and litigation, I will compare the characteristics of each one first, to find out to what extent the practice of arbitration would be incompatible with the practice of litigation before the national courts and second, to decide whether arbitration or litigation is the superior form of dispute resolution before the national courts. The content of the essay will indicate the advantages and disadvantages of each one by exploring the relative issues in the following study.
Arbitration and Litigation – definitions and features
In distinguishing between arbitration and litigation, it can be observed that a dispute which is settled by a neutral third party (an arbitrator), rather than a court of law, is said to undergo arbitration. The tacit meaning of a dispute settled by a court of law is one which undergoes litigation.2 In England, this can be held in a form of legal trial by a single judge.3 Another explanation for this difference has been stated by E.G. Hinkelman (2000), in the Dictionary of International Trade: “the resolution of a dispute between two parties through a voluntary or contractually required hearing and determination by an impartial third party”.
Basically, the voluntary submission of a dispute in arbitration gives the parties their right to enter into the processing of the dispute resolution.4 Unlike litigation, the parties are not required to submit their dispute to arbitration without their agreement. Nor are they obliged to do so. But once they have agreed, they will be obliged to abide by the arbitration of their choice. An important point which should be made is that while the arbitration is expected to be used as a resolution in the case of dispute; an arbitrator may be nominated without any dispute existing between the parties, for example, the parties may suggest that the cost of an asset is to be specified by an arbitrator.5 However, Ernest Enobun (2008) stated that:
“Arbitration can be shared with litigation in some judicial features as “Filing of processes; taking of evidence; an official panel; use of laid down laws and procedures; and delivery of final decision by the panel”.6
Arbitration has been defined by Professor Fox as “the litigation of a dispute before an arbitrator rather than a judge”.7
In addition, unlike litigation, arbitration may not be suitable for settling all kinds of disputes that may arise between parties. National courts may provide limitations for the disputes which are capable of being resolved by arbitration. However, a judicial procedure of arbitration provides fair and final resolution for the parties. Moreover, the procedure for resolving the dispute under arbitration can, to a large degree, be chosen by the parties themselves, but this procedure must contain at least the lowest degree of the requirements of due procedure as the national laws and international agreements provide. Additionally, the binding nature of the award is one of the main features in arbitration and as this stems from the agreement between the parties to arbitration, it will mostly be accepted by national laws.8
International Arbitration and National Litigation
It has been commonly established that international arbitration has distinct advantages over national litigation regarding the resolution of disputes in international commerce. The result of comparing the advantages and disadvantages of arbitration and litigation has been practically decided by resolving many legal cases of commercial disputes, using both methods in such circumstances. The argument has been in favour of arbitration as the best method of resolving commercial disputes. In purely domestic disputes, the question of whether arbitration or litigation is the best suggests that they could be equivalent. In such an event, the decision may be made in favour of civil jurisdictions by relying upon the circumstances of each particular episode and the reputation and the procedures of the local courts.9
In international disputes, the preference and the priority is certainly for international arbitration. In the domestic arena, the availability of national courts as well as national arbitration, gives the freedom of selection to parties seeking a binding settlement for their disputes. In the international arena there is no alternative but for international arbitration rather than the national courts to settle such international commercial disputes. Therefore, the available selection is between resorting to a national court and resorting to international arbitration.10
In the event where the agreement of submitting a dispute to a specific court was absented between the parties, a claimant who wished to start claiming would mostly be bound to resort to the court where the defendant was residing. In this situation, not only will the court be “foreign” for the claimant, but also the nature, region and characterization. It can be impossible for the claimant to be represented by lawyers of his own nationality. Alternatively, he will have to deal with foreign lawyers in that region. Furthermore, the claimant may discover that the language of the court does not comply with the language of the contract, so that he has to translate all relevant documents and evidence, taking into account all additional expenses, time and effort. At the end of the day, the claimant may discover that the court is not competent to handle international commercial disputes, and that its procedures are not sufficient to resolve them.11
It would be unreasonable to settle such disputes relating to international commercial transactions by foreign national courts given all of these obstacles. Nor it is reasonable even if one of the parties to the contract is resident in the state of that court. The private party to the contract will mostly refuse to submit his dispute to the national courts of the resident party. That is because the private party will mostly have weak or no expertise in the procedures of that foreign law, when in front of judges acting under that law. In such situations, resorting to international arbitration, in adequate and accustomed procedures, would be more agreeable than resorting to national courts. In fact, setting up a careful choice of tribunal with sophisticated arbitrators, who have a high level of experience in the language and commercial procedures of disputes, would be attractively accepted by traders and international commercial institutions. Those diligent arrangements can guarantee the best result for the resolution of disputes, compared to those offered by national courts, which are uncertain.12
Where parties from different countries prefer to submit their dispute to arbitration, they can be free to make their own choice of procedures to be adopted in resolving their dispute; this can be provided in most arbitration laws as they guarantee such processes internationally.13
It is commonly known that arbitration depends essentially on the agreement of the parties to submit their dispute to their own choice of method of resolution. This can happen even if the dispute has already arisen. This explains why the parties to arbitration may refuse the decision of a tribunal in certain circumstances, because the decision of the tribunal is not necessarily binding if one of the parties disagreed to arbitration in the first place, or because of the invalidity of the entire agreement. In general, the arbitration award is obligatory to the parties, depending on their arbitration agreement. Withal it is obligatory by the majority regulations of arbitral rules. As an award may be reviewed by the courts, to check whether it was approved in accordance with jurisdiction or by equitable procedures, the parties will mostly not be allowed to appeal the merits of an award in domestic law.14
The confidentiality of the arbitration is highly guaranteed to the parties; hearings and pleadings are not declared in a public attendance and are not available for anyone other than the relative parties. This is a great idiosyncratic advantage that can be offered by arbitration in critical and special matters, if the parties do not wish their specific details, regarding commercial transactions, to be disclosed publicly. In fact, the arguments were made in Parliament before adoption of the English Arbitration Act 1996. It has been suggested that the confidentiality of the documents and evidence should be guaranteed, as well as the award, of the arbitration. However, confidentiality may not be ascertained in some circumstances of international cases of law, the courts may not guarantee this right for parties and may disclose the documents in some cases.15
One of the most distinctive advantages of the arbitration procedure is the enforcement of the arbitral award internationally. Where court judgments are confined to enforcing decisions of the local courts for the state parties privately, The New York Convention on the recognition and enforcement of foreign arbitral awards favours this feature to be expanded to the international context, in enforcing and recognizing the arbitral awards. This is so much easier and attractive for parties coming from different countries with diverse expectations, rather than limiting the enforceability to the local courts.16 All of the above advantages are unlikely to be available in litigation.
It can be argued that international arbitration is functionally quicker and less-expensive than the proceedings of domestic courts. In general, there is more flexibility offered by the procedures adopted in international arbitration than those adopted in domestic courts, as the parties can create the procedures for their own requirements, however, this cannot necessarily prove that arbitration is quicker than litigation in every case. The final summarization of the judgment procedures of the domestic court can be superior to that of arbitration, which means that claims can be processed quickly without needing lots of evidence. In addition, the domestic courts are generally funded governmentally, but arbitration must be funded privately by the parties themselves including all additional fees for holding the arbitration. This explains why arbitration can be more expensive than litigation.17
The civil procedure rules and practice of national courts
In considering litigation procedures becoming as competitive a form of resolution as arbitration, the civil procedure rules of England and Wales have had several dramatic changes in recent decades. In spite of many revisions resulting from the review of the civil jurisdiction, more considerable changes to attenuate the litigation expenses and delays, and to depress the length of continuing the trials, are required. Following the justice reports of Lord Woolf in 1995 and 1996, extensive reforms and revisions has been made to the civil procedure rules (CPR) by statutory method, and this has been in effect from 26 April 1999. The CPR includes the code for conducting civil procedures in the courts of each country, the high court and the court of appeal. Gody, R. (2004), suggested that:
“The main concept underpinning the CPR is that of ‘the overriding objective of enabling the court to deal with cases justly. This must be given effect to by the court when making decisions and by actively managing cases, and by the parties. The CPR has introduced several changes in terminology. Most importantly, the parties to an action are now referred to as the claimant and the defendant, the former writ of summons has become a claim form pleadings are referred to as statements of case, and interlocutory applications are referred to as interim applications. Statements of case include the claim form, particulars of claim, defence, counterclaim, pt 20 claims, reply to defence and any further information in relation to the above. All statements of case must contain a statement of truth. Obviously, the parties cannot prepare for trial, or even negotiate effectively, unless each knows the nature of the case he has to meet. It is the function of statement of case to define the issue, so that the parties know what facts are disputed and will have to be proved, and what facts are admitted, making it unnecessary to call evidence about them”.18
As can be seen from the speech of Gody, R. above, the ambiguity and the limited level of freedom that exists in litigation when the parties submit to dispute by this method, does not exist in arbitration as the parties to arbitration can, to a large degree, be entered into the proceedings of the arbitration. In addition to this is the lack of confidentiality when practicing the procedure of civil law publicly. Given that considerable changes and reforms have been made to the civil procedure, it still seems from Gody’s speech that some other obstacles exist in the system of civil procedure, as he states that:
“This laudable objective is not always achieved. Counsel settling statements of case are usually anxious to preserve the maximum amount of freedom to manoeuvre. This desire manifests itself in two ways: a reluctance to make admissions at any early stage in the proceedings, even where the allegation is unlikely to be seriously disputed at the trial; and the avoidance of particularity in the statement of fact set out in the statement of the case, lest the parties’ case should be weakened if one of the details alleged is proved not to be correct. By contrast, counsel on the other side will endeavour to tie down his opponent to more precise contentions by requiring him to give further and better particulars of his statements of case”.19
Arbitration vs litigation
The relative merits of arbitration and litigation have been the subject of many arguments. A famous story of the Macao Sardine Case which has been analysed by Sir Michael Kerr was one of the attractive debates regarding the comparison between arbitration and litigation. Sir Michael Kerr has mentioned that he was asked, in the meeting in New York of the International Bar Association in September 1986, to speak about the question of whether ‘Is litigation so bad after considering the qualities and great popularity of the Commercial Court in London, and no doubt of similar courts in other venues, as well as many good points in favour of litigation generally’. He said that:
“If it is well administered - the answer is obviously, NO. To justify this, one only has to consider some of the advantages of litigation: such as the possibility of consolidating related disputes by the 'third party' procedure before one tribunal; the certainty of consistent approach by the application of the same legal principles to different disputes raising similar issues; the control exercisable by the parties over the proper progress and conduct of the proceedings within a prescribed framework by means of a known and enforceable procedure; the availability of a neutral, professionally qualified tribunal with the single objective of deciding cases according to Law; and the existence of rights of appeal, if necessary, to reverse decisions which are plainly wrong. I therefore had no difficulty in submitting that in many situations there was a great deal to be said in favour of litigation, and that arbitration clauses could prove highly disadvantageous and unsatisfactory, to put it mildly”.20
However, Sir Michael Kerr then continued his speech by describing the facts of the Macao Sardine Case. This gave a different opinion when considering the functional and effective elements of arbitration. He stated the case in the following context as he said:
“An old-established company in Macao had been in the business of producing and marketing tins of sardines for many years, when it runs into financial difficulties. Fortunately tin was relatively cheap even then, from Malaysia and elsewhere, The company also had its own inexpensive local labour force, as well as the necessary machinery and moulds in its factory for the manufacture of the tins. But sardines and oil had become unexpectedly expensive. The company's immediate problem was an order by a Taiwanese customer under a long-term contract for 400 tons FOB, about 280,000 tins of sardines. Since the Taiwanese and the Macao Company were both members of NPSMMA, the North Pacific Sardine Manufacture and Marketing Association, any default was liable to be disastrous. On the other hand, fulfilment was financially impossible. After much deliberation, and only with great reluctance; the company decided that it had no alternative but to fill the tins with mud, of comparable specific gravity. Since its factory in Macao was situated close to a large estuary on the China Sea, there was no shortage of mud, and the collection and canning of the necessary quantities presented no problem. When the tins had been sealed and checked in the usual manner and packed in the company's cases, the consignment was shipped on a tramp steamer plying in the Pacific, which had been nominated by the Taiwanese customers pursuant to the contract. The bill of lading was issued to the order of the buyers and duly negotiated against their documentary credit established in Hong Kong. The company's immediate cash-flow problems were spectacularly eased, and it viewed the future with a measure of confidence, since the sardine market appeared ID be hardening;
Nothing of note happened for years. The consignment was sold and resold many times on a steadily rising market. It became a recognised stand-by 'spot' parcel throughout Southeast Asia and the Pacific. It was usually sold afloat, and rarely unloaded. All the contracts of sale and resale were on the standard PRP form (FOB) of the Pacific Rim Produce Association, and therefore subject to Hong Kong law and the jurisdiction of the Commercial Court in Hong Kong. There was hardly enough room for the countless endorsements on the relatively few bills of lading which covered it as time passed, and many traders' names appeared repeatedly in an ever-lengthening string. Unfortunately matters went wrong for years later. An earthquake in the Philippines produced a sudden food shortage. Together with other staple commodities, this parcel was hurriedly bought 'SPOT' from its then Japanese owners by a Government Trading Agency in the Philippines and was ultimately taken into stock by a chain of supermarkets based in Manila. Then all hell broke loose"
As a conclusion to the case, I will summarize the outcomes of this case briefly as I understand them from the analysis of Sir Michael Kerr, as this case has shifted opinions dramatically in favour of arbitration, including those of Sir Michael Kerr. As a consequence of discovering this exceptional breach, lots of buyers had no choice but to claim from their sellers. For the commercial court of Hong Kong this was fine as long as all the contracts were related to the law of Hong Kong, every plaintiff could follow his seller outside the jurisdiction where the seller was no longer be available in the Hong Kong markets, so no one was away from the authority of the court jurisdiction. The basis of the main claim was the Philippine buyers as the original claimants against their Japanese sellers, all next claims were being dropped from the original claim, and all were acting as third party dealers.22
Regarding the liability, all buyers pleaded that there was no defence to any of the claims in liability and the consignment had been unreasonably fitted for unintended purposes and not prepared for human consumption, and that it had not been a merchantable shipment. Regarding the amount of compensation, there were variations of claims with regards to the difference in prices between the time of delivery and the time of payment plus interest and costs in all cases. Subsequently, each claim followed the claim forward of it in the string of many claimant buyers. The defendants offered flimsy arguments such as force majeure and acts of God. In the commercial court of Hong Kong there was no problem dealing simply with disputes according to litigation. In spite of many negotiated settlements, there still remained about 47 plaintiffs and defendants and 46 claims not yet resolved. After lots of hearings in the front of the commercial judge who was judging the case, there was no option but to agree that two people with commercial expertise should be brought out from London to discuss the relative issues regarding all sellers and buyers to sort out the disputes. Consequently, the submissions were concise and hearings took no more than a day. The judge did not hesitate to conclude that there was no defence in liability to any of claims.23
”First, that since the probability or serious possibility of a resale had been foreseeable in each case; the proper award was that each plaintiff buyer was entitled to an indemnity in damages and costs from his seller. Secondly, on the quantification of the damages, the judge briefly heard the evidence of two expert witnesses and concluded that the consignment was worthless. He therefore considered it unnecessary to deal with any of the various alternatives pleaded in the statements of claim. The tins could not be salvaged for their metal content, since the smell of the mud soon became overpowering, and the cost of disposing of it exceeded the scrap value of the metal. He therefore accepted that the Philippine supermarket had been justified in dumping the bulk of the consignment in the port of Manila. But he rejected their additional claim for the handling costs involved.”24
The trial after that took longer than expected in many circles, and for many years. The comments of Lord Michael Kerr on this case are worthy of being included as a conclusion to this essay. He said that, investigating all the matters by arbitration was evidently far more complex than just the Hong Kong case, which appeared to be superficial when thought about retrospectively. Actually, the action ended for 46 claims speedily and cheaply by adopting an instrument of flexible procedures for the case. He said:
“But the ultimate test of a legal process must be the forensic quality of the reasoning and final decision’s speed, low cost and procedural informality are not everything. That is a truism which is constantly stressed by supporters of arbitration and frequently forgotten by advocates of commercial litigation”.25
He finally said that: “For present purposes it is sufficient to conclude, as I respectfully do, that - occasionally - litigation is arguably, 'not so bad after all'”.26
Conclusion
In conclusion, choosing arbitration or litigation may depend on the current situation of the dispute. Some kinds of dispute are not capable of being resolved by arbitration but require litigation. Hence, the question in such a situation would basically be the one of the most convenient, effective, and less-expensive technique to settle the dispute.27 By examining the practical procedures of each one, we can observe that international arbitration is superior to litigation for the resolution of disputes, especially when considering the effective action of it on the Macao Sardine Case. Internationally, the recognition and enforcement of the award has been recognised in the UN conventions in 1998. Accordingly, the local courts have been directed by the New York convention to remit the dispute between parties to arbitration, as long as their contract so provides. Given all of these facilities, plus the advanced advantages given in the main body of the essay, I would give arbitration the priority over litigation.
References
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