What is Arbitration? And Why Does it Matter to Startups?

Let’s face it: no startup founder wants a legal dispute hindering the growth of a new company.

But the reality is these disputes come up more often, and in more forms, than you might think.

If a conflict does arise between businesses who have a contract for goods or services, the contract will usually specify how disputes are to be resolved.

Litigation, or going to court, is probably the most recognisable avenue for disputing parties.

But going to court is often a time consuming, expensive and highly formal enterprise. Thankfully there are alternative forms of dispute resolution available to help the disputing parties come to a resolution.

One common type of alternative dispute resolution (ADR) is arbitration.

In this article, we tackle:

• What is arbitration?
• Ad-hoc vs Institutional Arbitration
• Why should parties go to arbitration?
• How can parties arbitrate?
• What are the advantages of arbitration?
• How is arbitration implemented in Australia?
• Arbitration services on demand

What is arbitration?

Arbitration is a process to help parties resolve a dispute and come to an agreement. It’s one of several forms of alternative dispute resolution designed to be cheaper, faster, and less formal than litigation, or going to court to try and settle the matter.

In an arbitration, the disputing parties present arguments and evidence to an independent and impartial third party – a dispute resolution practitioner known as an arbitrator – who makes a determination. Similar to court, this arbitrator's decision is binding.

As we mentioned above, the contract that outlines the terms of a business arrangement will also usually specify how a dispute resolution will proceed. These are the rules that govern the conduct of the arbitration. There are two types: institutional or ad hoc.

Ad-Hoc vs. Institutional Arbitration

Institutional arbitration involves incorporating the rules of the selected institution into the arbitration clause. That institution will then administer the arbitration.

Institutional rules are very comprehensive and provide guidelines for the proceedings from start to finish. Parties may prefer this as these rules cater for any contingencies that may arise, such as a party refusing to cooperate.

Examples of such institutions include the Australian Dispute Centre, the Australian Centre for International Commercial Arbitration, and the Singapore International Arbitration Centre.

As the same implies, ad hoc arbitration takes place when the need arises. It is not administered by an institution.

Parties undertaking ad hoc arbitration can draft the arbitral rules themselves or choose rules to apply to the arbitration. The United Nations Commission on International Trade Law (UNCITRAL) is one such set of arbitral rules parties may adopt.

The UNCITRAL arbitration rules are widely used in ad hoc arbitrations, as they allow parties the freedom to choose the appointing authority, while offering a comprehensive set of procedural rules to guide the proceedings.

The use of ad hoc arbitration avoids the need to pay fees to an institution. However, it does have it’s disadvantages such as the fact that certain jurisdictions only recognise institutional arbitration.

Why should parties go to arbitration?

As we’ve established, arbitration is a form of alternative dispute resolution. Parties should consider arbitration as a method of resolving disputes when they can’t come to an agreement informally, they need that resolution to be legally binding, and would rather avoid going to court.

How is arbitration defined?

All arbitral proceedings are characterised by six important attributes:

• Consensual
• Neutral
• Flexible
• Private and confidential
• Final
• Enforceable

Let's dig into each of those attributes.

Consensual

Do both parties have to agree to arbitration? Absolutely: Arbitration is a voluntary and consensual process.

When the parties enter into a contract there will be an arbitration clause. This clause offers the authority to embark on an arbitration. That means you agree arbitration is the process you will undertake to resolve any contractual disputes that may arise when you sign that contract.

An arbitral tribunal will only have jurisdiction if all parties to the dispute have agreed to submit their disputes to arbitration.

This compares to the litigation (court) process where one party can file a complaint that will automatically bring the other party into the dispute.

Neutral

Arbitration is a neutral forum for the dispute to be heard.

Parties often choose where the arbitration will be held and if it is a panel of arbitrators, the parties can choose arbitrators from different backgrounds.

It’s the job of these arbitrators to remain impartial and unprejudiced and reach their decision based solely on the evidence presented.

Flexible

The parties have the choice in determining how, where, by whom, and in what language their dispute can be heard.

In comparison, litigation in a court means the parties cannot choose the judge and are bound by the laws of the court in which the matter is initiated.

Private and confidential

Unlike a dispute heard in a court that is later uploaded onto a public database, arbitration disputes are private and the parties can agree specifically that the hearing and evidence are confidential.

Final

Unlike the litigation process in courts where a decision can be appealed, an arbitral award is generally final and cannot be challenged except in very limited circumstances.

Enforceable

Is arbitration legally binding? In short - yes!

Regardless of where the arbitration dispute is held, the arbitration award is enforceable in most countries. This is because over 160 countries have ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards – also known as the New York Convention.

Under the New York Convention, there are a limited number of reasons why a contracting state can refuse to enforce an arbitral award.

It is important to note that for the enforceability of the award, the forum where the arbitration is to be heard must be a party to the New York Convention.

How can parties arbitrate?

There are a number of steps involved in arbitration, starting with an agreement to undertake arbitration proceedings.

Agreement to arbitrate

The initial contract between the parties will usually have a dispute resolution clause that states that the dispute is to be determined through arbitration.

This clause can be general or specific and include where the arbitration will take place (the seat), what language the arbitration will be heard in, the number of arbitrators and the procedural rules that will govern the arbitration; in other words, whether the arbitration will be ad hoc or not.

It is important that this dispute resolution clause is drafted properly so that the intentions and wishes of the parties are captured.

The Australian Centre for International Commercial Arbitration on its website sets out both an ACICA model clause and an UNCITRAL model clause. The ACICA model clause wording is as follows:

"Any dispute, controversy or claim arising out of, relating to or in connection with this contract, including any question regarding its existence, validity or termination, shall be resolved by arbitration in accordance with the ACICA Arbitration Rules. The seat of arbitration shall be Sydney, Australia [or choose another city]. The language of the arbitration shall be English [or choose another language]. The number of arbitrators shall be one [or three, or delete this sentence and rely on Article 10 of the ACICA Arbitration Rules]."

It should be noted that should any of the other provisions of the contract be deemed invalid at any stage, the dispute resolution clause stands alone.

Appointment of the arbitrators

The dispute resolution clause will also provide how the arbitrators will be appointed.

If the dispute resolution clause is silent on this then the institutional rules the dispute resolution clause has chosen to govern the dispute will provide how the arbitrators are to be appointed

If the arbitration is ad hoc, then the UNCITRAL Rules will provide how the arbitrator is to be appointed.

How much does arbitration cost?

While costs will vary from firm to firm, you can expect arbitration to be cheaper than using the court process. Indeed, it is known to be faster than going to court as there is less waiting time for a hearing.

The parties must pay the arbitrators for their services and will need to pay for the hearing venue as well as the costs of an administering institution.

Powers and duties of the tribunal

The arbitrators’ powers to determine the dispute come from the arbitration agreement, the rules of the institution/UNCITRAL and the applicable national law of the seat of arbitration.

Arbitration procedure

This is determined either by the rules of the institution chosen for the arbitration, for example the Singapore International Arbitration Centre, or UNCITRAL if the arbitration is ad hoc.

Awards

Awards are the determinations reached by the arbitrator or arbitral committee. They are final and binding. As mentioned above there are only limited circumstances where they can be challenged or not enforced. This is also a benefit of arbitration as opposed to litigation which has a much wider appeals process.

What are the advantages of arbitration?

There are several advantages to arbitration over other forms of dispute resolution, like litigation.

• Arbitration offers an easy way to enforce awards, or decisions.
• Parties have the ability to choose who decides the dispute by appointing an arbitrator
• Proceedings are flexible and private – unlike in the courts, arbitration proceedings are not publicly published
• Finally, arbitration offers neutrality: if there are two parties from two different countries, arbitration offers them a place where the dispute can be heard on neutral ground.

How is arbitration implemented in Australia?

Many commercial and construction disputes are arbitrated in Australia.

This is generally for the reasons stated above with respect to the benefits and nature of arbitration. If the parties are both from Australia, they may wish to rely on a domestic dispute resolution centre such as the Australian Dispute Centre.

If one party is Australian and the other international, and they agree that the seat of the arbitration is in Australia, then they can use an institution such as the Australian International Commercial Arbitration Centre.

Australia is quite an advantageous arbitration seat. Not only because it is a party to the New York Convention, but also because of the way the Australian legal system is structured.

Australia has legislation that caters for both domestic arbitrations and international arbitrations. As the court systems in each state continue to be inundated with matters and the timeframe for a hearing continues to be elongated, arbitration can provide an effective way of alternatively resolving a dispute.

Arbitration services on demand

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