Taking legal action: to arbitrate, mediate or litigate?

05 August 2015

The decision to take legal action requires careful consideration of costs, expected outcome and commercial relationships.

Few executives will actively seek a dispute with a supplier or business partner, but sometimes they are unavoidable. Yet potentially costly litigation is not the only recourse. 

Too often, senior management are not as well informed about alternatives to litigation as they could be, says Sanjay Desai, Associate at JLT Specialty and qualified solicitor.

“Businesses are not always made fully aware of the all the options available to them. Talk often turns quickly to litigation, while details on settlement or arbitration are not discussed in depth,” Desai says.

There are three main options for resolving a commercial dispute:

  • Mediation
  • Arbitration
  • Litigation

There is no simple route to establishing which option is best as this will depend on individual circumstances, but there are some key pros and cons that management should consider when weighing up their options, says Desai, most notably around:

  • Cost
  • Speed of resolution
  • Finality of the decision.

Mediation and arbitration are generally considered to be faster and cheaper. There are many twists and turns to litigation that can drive up the cost and the time it takes to achieve resolution, especially for a complex case.

With arbitration, the costs are typically limited to the arbitrator’s fees and the venue hire, while the process may take a few weeks to conclude.

Reaching resolution

The arbitrator’s decision may not be binding, however, depending on what is agreed by both parties at the outset.

So the likelihood of reaching a resolution should be an important consideration in whether to pursue the arbitration option.

“Arbitration is faster and less costly, but the facts of the case, willingness of parties and the quality of the arbitrator are all factors to be considered,” says Desai.

“If a non-binding arbitration is selected and you can’t reach an agreement, then you will have to go down the litigation route anyway and will have only succeeded in adding to your costs,” Desai adds.

Arbitration and mediation are less confrontational and more conciliatory ways of settling disputes, explains Desai. Consequently, they may be more suitable to disputes between parties where maintaining an amicable or ongoing relationship is an important consideration. 

Mediation is the softest form of dispute resolution, and is less widely used than arbitration. It may be a good option where parties can find common ground and want to maintain an ongoing contractual relationship, but it does not result in a binding decision.

In mediation the parties make the decision – the mediator just helps the parties to work out their differences – while in arbitration it is the arbitrator that makes the decision after hearing from both parties.

Flexibility and control

In recent years, arbitration has become a much more popular way of settling disputes and is often stipulated in commercial contracts, in particular contracts involving international trade. 

Flexibility and control are big benefits of arbitration, says Desai. Arbitration gives the parties greater control than litigation, as the parties can select the arbitrator and the venue and set the ground rules.

The ability to select the arbitrator is a particular strength of arbitration and lends itself to disputes of a technical nature – such as a dispute about the quality of a material supplied, or where specific technical expertise is required, like construction, explains Desai.

In contrast, litigation may be the better option for more complex legal disputes – those that turn on a legal interpretation of a contract wording, for example – or those where the parties are unable to cooperate. 

Litigation can also accommodate related claims from third parties. The court process allows parties to be joined to an action – this may be desirable, for example, where a company wishes to bring in another company, such as a supplier or contractor, to share liability.

Finality of the decision is another important consideration. Unlike litigation, there are few, if any, opportunities to appeal an arbitrator’s decision. “In a binding arbitrator’s decision, both parties can move on and resume business quickly, whatever the outcome,” says Desai. 

Usually commercial litigation is a public affair, while arbitration offers the benefit of privacy and can be kept confidential, therefore keeping reputation intact.

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For further information please contact Sanjay Desai, Case Manager, Corporate Recovery on +44 20 7558 3145