Arbitration Vs Litigation

 - by Prateek Narwal and Shretima Bagri

In the past few decades, arbitration has become a mainstay in resolving legal disputes. We are living in the era of globalization. The globalization has thrown open several challenges and opportunities. Globalization, Liberalization and Privatization has introduced the cut throat competition not only in the various sectors of the economy but also in various aspects of human life. The life system itself has undergone a paradoxical change; people want to do everything quickly and fastly. For example, nowadays the food system itself is termed as fast food. On the other hand, revolution made by Information and Communication Technology (ICT) has made far reaching impact in every sector of economy as well as human life. India is one of the fastest growing economies in the world. Where there is a high rate of economic growth, necessarily it translate to the increase of income, improvement of purchasing power, thereby it leads to the growth of effective demand and supply which ultimately results into the standard of living, life expectancy, quality of human life and others. The opening upon Indian markets to the foreign firms in various fields of Industry including service sector has tremendously increased volume of cases in the courts, which are already over burdened with the huge arrears of backlog and pending for a quite long time. This not only affects the individuals /institutions, but also the overall growth of the Indian economy.

The need for judicial reforms has become more important than ever before, unless it is addressed on a war footing basis. It will have a huge immediate effect upon the confidence of the investors in general, foreign investors in particular. There by, it will have overall effect on the investment climate in India, resulting in the reduction of Foreign Direct Investment (FDI) in India which will not promote the acceleration of economic growth, promote inflation; thereby it will obstruct the entire story of Indian Economic Growth in India. It is in this context, several initiatives have been taken to reduce the pendency of cases and to ensure cases are disposed in a speedy manner. In addition to this, the legislature has introduced the new alternative dispute mechanism in the form of Arbitration and Conciliation Act, 1996, by repealing the old Arbitration and Conciliation Act, 1940, which has out lived its utility. The Indian Arbitration and Conciliation Act ,1996 has been passed by the parliament of India for the purpose of specifically adopting the UNCITRAL Model Law in the International Commercial Arbitration and implement the same. The Civil Procedure Code, 2000 Amendment and 2002 Amendment in the Legal Services Authority Act has been implemented, which empowers the court to mandatorily refer the parties for Alternate Dispute Resolution including Arbitration, Settlement, and Mediation with an option. If the alternate dispute resolution in India fails, parties can come back to the court and the cases will be decided thereafter. The implementation of Arbitration and Conciliation Act, 1996 has miserably failed in fulfilling the expectations of the litigants because of the various factors. The failure of Arbitration and Conciliation Act, 1996 is mainly attributed because of the following reasons:

·         Commercial nature of the lawyers .

·         Judicial frustration.

·         Non acceptance of the Judiciary for tribunalisation.

To make the Arbitration proceedings as less court controlled and court structured and makes it considerably free from the judicial intervention.

The statistic tells us more than 30 millions of cases are pending by 2007 . This is a syndrome not exclusively confined to India or developing countries, but also to the developed countries. However, the developed countries quickly learn the lessons , successfully come out of this problem to a considerable extent through an effective implementation of Alternative Dispute Resolution mechanism in general and Arbitration in particular. Whereas India has adopted the Arbitration and Conciliation

Arbitration

A form of alternative dispute resolution (ADR), is a technique for the resolution of disputes outside the courts. The parties to a dispute refer it to arbitration by one or more persons i.e the "arbitrators", "arbiters" or "arbitral tribunal", and agree to be bound by the arbitration decision (the "award"). A third party reviews the evidence in the case and imposes a decision that is legally binding on both sides and enforceable in the courts

Pros of Arbitration:

Promoted as a way to resolve disputes efficiently, proponents of arbitration commonly point to a number of advantages it offers over litigation, court hearings, and trials.

Avoids hostility. Because the parties in an arbitration are usually encouraged to participate fully and sometimes even to help structure the resolution, they are often more likely to work together peaceably rather than escalate their angst and hostility toward one another, as is often the case in litigation.

Usually cheaper than litigation.  Arbitration is becoming more costly as more entrenched and more experienced lawyers take up the cause. It is not unusual, for example, for a well-known arbitrator to charge $3,000 to $4,000 per day for his or her services. And most parties in arbitrations will also hire lawyers to help them through the process, adding to their costs. Still, resolving a case through arbitration is usually far less costly than proceeding through litigation because the process is quicker and generally less complicated than a court proceeding.

Faster than litigation. According to a recent study by the Federal Mediation and Conciliation Services, the average time from filing to decision was about 475 days in an arbitrated case, while a similar case took from 18 months to three years to wend its way through the courts.

Flexible. Unlike trials, which must be worked into overcrowded court calendars, arbitration hearings can usually be scheduled around the needs and availabilities of those involved, including weekends and evenings.

Simplified rules of evidence and procedure. The often convoluted rules of evidence and procedure do not apply in arbitration proceedings -- making them less stilted and more easily adapted to the needs of those involved. Importantly, arbitration dispenses with the procedure called discovery that involves taking and answering interrogatories, depositions, and requests to produce documents -- often derided as a delaying and game-playing tactic of litigation. In arbitrations, most matters, such as who will be called as a witness and what documents must be produced, are handled with a simple phone call.

Private. Arbitration proceedings are generally held in private. And parties sometimes agree to keep the proceedings and terms of the final resolution confidential. Both of these safeguards can be a boon if the subject matter of the dispute might cause some embarrassment or reveal private information, such as a company's client list.

Cons of Arbitration:

Being aware of the possible drawbacks of arbitration will help you make an informed decision about whether to enter or remain in a consumer transaction that mandates it -- or whether to choose it as a resolution technique if a dispute arises.

Limited recourse. A final decision is hard to shake. If the arbitrator's award is unfair or illogical, a consumer may well be stuck with it and barred forever from airing the underlying claim in court.

Uneven playing field. Some are concerned that the "take-it-or-leave-it" nature of many arbitration clauses work in favor of a large employer or manufacturer when challenged by an employee or consumer who has shallower pockets and less power.

Most retailers -- car dealers are repeat offenders here -- do not mention the arbitration clause before requiring the customer to sign the purchase agreement. Or they will wait until you are ready to drive the car off the lot, then casually mention that they won't sell unless you sign.

Questionable objectivity.  Another concern is that the process of choosing an arbitrator is not an objective one, particularly when the decision-maker is picked by an agency from a pool list, where those who become favorites may get assigned cases more often.

Adding possible complication: Many of the national arbitration groups actively market their services to companies that issue credit cards or sell goods to consumers, casting additional questions on the alleged neutral's objectivity. And an arbitrator chosen by a party within an industry may be less objective, more likely to be biased in favor of the appointing group.

Lack of transparency.

As mentioned, the fact that arbitration hearings are generally held in private rather than in an open courtroom, and decisions are usually not publicly accessible, is considered a benefit by some people in some situations. Others, however, lament that this lack of transparency makes the process more likely to be tainted or biased, which is especially troublesome because arbitration decisions are so infrequently reviewed by the courts.

Rising costs. While most still claim that arbitration is less costly than litigation, its costs are increasing. According to a recent survey by Public Citizen, a consumer watchdog group, the cost of initiating an arbitration is significantly higher than the cost of filing a lawsuit: $6,650 to $11,625 to initiate a claim to arbitrate a consumer claim worth $80,000 versus $221 to file that action in a particular county court. Add to that the arbitrator's fees -- multiplied by three if a panel is involved -- in addition to administrative costs, and the process appears to be less of a bargain.

What is litigation?

Litigation is the term used to describe proceedings initiated between two opposing parties to enforce or defend a legal right.Litigation is typically settled by agreement between the parties,but may also be heard and decided by a jury or judge in court.

Pros and Cons of Litigation

The decision to take legal action needs to be very carefully thought out and taken on only as part of a larger strategy. Legal battles are costly and require a high degree of commitment over a significant period of time. Sadly, laws and regulations in Canada regarding intensive livestock operations are relatively weak, so you must assess the consequences of losing, as well as the benefits of winning your case. Do not decide to take legal action based on the feeling or belief that what the ILO is doing is wrong, you are right, and therefore you should win. Have a full and frank discussion with your legal counsel to assess whether your case is winnable. If your group decides that going to court does make sense, be sure you are well-informed and able to commit the necessary time, money and energy required for the duration of the court battle.

Pros

  • Can create precedent that will prevent futureILOs from getting away with the offence
  • Can stop or delay development while legal issues remain unresolved
  • Can show theILO corporation you are serious
  • Can expose theILO to increased public scrutiny as your case gains access to evidence

 Cons

  • Can create a damaging precedent if you lose, making it harder for other communities to defend themselves against the offence in question
  • Can be very costly and use up resources (financial and personal) that could have been used in other ways
  • Can heighten conflict, making it more difficult to repair relationships in the community later on

You may have to pay court costs to the other side if you lose. Costs are a reimbursement for the expense of bringing or defending an action in Court. The Court may award costs as part of the settlement of a legal action. Normally, the losing party must pay costs to the winning party.

Hiring a Lawyer

A major consideration in deciding whether to pursue a legal action is finding the right lawyer and paying for his/her services. You will have to pay the lawyer’s fees (charges for work done by the lawyer) as well as disbursements (things the lawyer paid for on your behalf in order to pursue the case). The lawyer may charge an hourly rate (expect to pay from $200 to $400/hour), a flat fee, or he/she may work on contingency (a percentage of the settlement, payable only if you win).

To find a lawyer contact your province’s Private Bar, and any public interest organizations or environmental law groups that operate in your province (See the Provincial Resources section for your province for a list of public interest law groups). Some private firms will do “pro bono” work (that is, free of charge to you) as a form of public service.

When working with a lawyer it is important to be very explicit and focused in your communications. The group needs to have a clear decision-making process in order to instruct the lawyer effectively. A mutually respectful relationship that recognizes the expertise and interests of the lawyer and the client will be a major asset in any legal action.

Nuisance suits and “Right to Farm” legislation

Each province in Canada has passed some kind of “Right to Farm” legislation since 1996. These laws are apparently meant to protect farms and farmers from nuisance suits due to incompatibility with newer non-farm activities such as acreages and urban recreational uses. However, they are used to shield ILOs from liability for nuisance as well.

ILOs are protected from nuisance suits if they use “normally accepted agricultural practices”. In some provinces, having their activities so defined is all the ILO needs in order to avoid liability for nuisance. In Manitoba and Ontario, an ILO operator that does not meet the requirements of other relevant laws, such as municipal bylaws and environmental statutes, could be found to be operating outside of accepted practices, and thus open to liability for nuisance.

In every province, it is up to the neighbour making the complaint to prove that the ILO is not following normally accepted agricultural practices. The procedure for determining whether an ILO meets the criteria of the right to farm legislation varies from province to province. Some provide for a mediation process, others have a quasi-judicial administrative process.

Strict liability

Rylands v. Fletcher is the oft-cited precedent under Common Law for certain types of liability cases. In order for it to be relevant a physical invasion of land (such as a spill) resulting from the defendant’s actions (or failure to act) is required, it must have caused damage, and the plaintiff must own (or have an ownership interest in) the property in question. Rylands v. Fletcher will not apply if the court deems the use of the land in question is overly sensitive.

The Arbitration Process vs. the Litigation Process

You may have encountered an arbitration clause in a contract and wondered what it is and whether you should be happy or upset about this clause. Some contracts may contain a mandatory arbitration clause, which states that all disputes must be handled by arbitration.

Or a colleague may have suggested to you that you include an arbitration clause in a contract, and you are wondering why this would benefit you.

Arbitration as a process is very different from the process of litigation (trying cases in court), for business disputes. You are probably familiar with the litigation process, but you may not be familiar with arbitration.

Differences between Arbitration and Litigation

Litigation is a very old process that involves determining issues through a court, with a judge or jury. In this case, we're talking about civil litigation - disputes between two parties (as opposed to criminal litigation, which involves breaking laws.

Arbitration, on the other hand, involves two parties in a dispute who agree to work with a disinterested third party in an attempt to resolve the dispute.

Here are some differences between litigation and arbitration:

Public/Private, Formality

The arbitration process is private, between the two parties and informal, while litigation is a formal process conducted in a public courtroom.

Speed of Process

The arbitration process is fairly quick. Once an arbitrator is selected, the case can be heard immediately. In a civil litigation, on the other hand, a case must wait until the court has time to hear it; this can mean many months, even years, before the case is heard.

Cost of the Process

The costs for the arbitration process are limited to the fee of the arbitrator(depending on the size of the claim, expertise of the arbitrator, and expenses), and attorney fees.

Costs for litigation include attorney fees and court costs, which can be very high.

Selection of Arbitrator/Judge

The parties in the arbitration process decide jointly on the arbitrator; in a litigation, the judge is appointed and the parties have little or no say in the selection. The parties may have some say in whether a case is heard by a judge or a jury.

Use of Attorneys

Attorneys may represent the parties in an arbitration, but their role is limited; in civil litigation, attorneys spend much time gathering evidence, making motions, and presenting their cases; attorney costs in a litigation can be very high.

Evidence Allowed

The arbitration process has a limited evidence process, and the arbitrator controls what evidence is allowed, while litigation requires full disclosure of evidence to both parties. The rules of evidence do not apply in arbitration, so there are no subpoenas, no interrogatories, no discovery process.

Availability of Appeal

In binding arbitration, the parties usually have no appeal option, unless an appeal has been included in an arbitration clause.

Some arbitration decisions may be reviewed by a judge and may be vacated (removed) if you can prove that the arbitrator was biased. Litigation allows multiple appeals at various levels.

 

Arbitration vs. Litigation

ArbitrationLitigation
Private/Public
Private - between the two partiesPublic - in a courtroom
Type of ProceedingCivil - privateCivil and criminal
Evidence allowedLimited evidentiary processRules of evidence allowed
How arbitrator/judge selectedParties select arbitratorCourt appoints judge - parties have limited input
FormalityInformalFormal
Appeal availableUsually binding; no appeal possibleAppeal possible
Use of attorneysAt discretion of parties; limitedExtensive use of attorneys
Waiting time for case to be heardAs soon as arbitrator selected; shortMust wait for case to be scheduled; long
CostsFee for arbitrator, attorneysCourt costs, attorney fees; costly

 

 

 

 

 

 

Choice of dispute resolution mechanism is crucial in drafting and  egotiation of financial transactions. Usually lenders insist on having their preference inserted into the financial agreement and this is why dispute resolution clauses in such transactions reflect primarily the interests of lenders, and lenders seek efficient settlement of disputes. Traditionally large international banks and other financing parties have preferred choice of court clauses. Recently the International Swaps and Derivatives Association (“ISDA”) opted for arbitration in its Master Agreement for the sector.

Arbitration and litigation clauses in financial transactions are often compared in order to outline advantages/disadvantages. Instead, below is, first, an overview of the policy ends that lenders pursue in dispute resolution clauses and, afterwards, the arbitration vs litigation discussion is mapped against lenders’ interests.

Stability and predictability. Lenders favour venues for settlement of disputes which are renowned for consistent case law and reliable decision making. This is why often London and New York courts are selected in choice of court clauses (also courts in Switzerland, Luxembourg and others).

Neutrality. Lenders are interested to choose venues which exhibit low risks of influence on dispute resolution. This is why it is common to choose jurisdictions where decision making is deemed as independent: lenders seek to avoid political interference, possible risks of corruption, etc. Moreover, often neither party to the transaction is comfortable with appearing in the courts of the home country of the other one but would like to take the dispute to a neutral territory.

Professionalism. Lenders prefer to have their disputes decided by experts in the field. This means that the umpire should be cognizant not only in the applicable law and the relevant procedural rules but to understand the various interests of the stakeholders in financial transactions; to be commercially minded and look for the business rationale of clauses and provisions beyond the black letter of the law, understanding the intricacies of international finance. It has become a highly complex and convoluted area and so lenders prefer to entrust their disputes to persons already versed in it.

Confidentiality; speed; cost. Lenders would like to keep information regarding their disputes as private as possible and are known to seek cost-effective decision making.

Flexible enforceability. Lenders are usually very sensitive about tracing a debtor’s assets. This is why they want to be able to bring suit in various jurisdictions depending on where assets of the debtor might be found, or, if the dispute is to be concentrated in one jurisdiction, to be able to enforce in other jurisdictions as well. This is why lenders value both the flexibility of decision making and its ultimate enforceability. The primary concern is to be able to enforce against the assets, no matter where located.

Most often large international financing parties select courts in major financial centres, e.g. London and New York but also Paris, Geneva, Zurich, Luxembourg, etc. It is deemed that such jurisdictions provide: neutrality due to the low risk of interference into courts’ work; good professional training of judges and ability to understand commercial transactions; stable, consistent, predictable decision making, producing judgments that are highly respected and enforceable abroad.

However, the policy objectives outlined above seem to be better embraced by arbitration.

In terms of neutrality, arbitration is delocalized to a high level, although it remains within the framework of the law of the seat of the tribunal. Direct interference with arbitral process is seldom to be seen, especially if the seat is in a reliable jurisdiction. Moreover, risks with arbitration are lower as it entails a single procedure while court litigation may encompass two to three judicial instances. For the same reason arbitration takes less time, therefore costs less, too.

Professionalism is better catered for in arbitration as parties can choose renowned experts versed into the specific deals at stake instead of relying on the commercial understanding of judges. A recently established specialised institution, P.R.I.M.E. Finance, is premised on this. Court judgments within EU are enforced on basis of Regulation Brussels Ibis but there is no overarching international instrument for enforcement of judgments. The New York Convention is, however, universally accepted and implemented and can ensure enforcement in a wide array of instances. This gives awards better utility than judgments in terms of their enforcement.