Understanding litigation and dispute resolution is an essential element of building your Commercial Awareness. Find out what this is, and learn the pros and cons of both.

What is Litigation and Alternative Dispute Resolution (ADR)?

Litigation and/or dispute resolution refers to any disputes which arise over the course of a commercial deal.

The dispute could arise over many different issues and between any parties to the deal. For example, an individual could raise a claim against a company, or a company could raise a claim against any other companies who are party to the deal.

The most common disputes which fall under litigation refer to contractual, corporate management and restructuring matters, but can also involve competition, fraud and regulatory mechanism issues.

The main procedures for solving disputes are:

  • Litigation – This typically involves one party taking a claim to the courts, for a court judgement which is legally binding and enforceable.
  • Arbitration – This is form of private dispute resolution, where an arbitrator is called to settle a dispute through an ‘arbitration award’. Typically, the decision is legally binding and enforceable in the courts, unless the parties have included a contrary clause in their contract.
  • Mediation – This is a form of private dispute resolution, where a settlement is facilitated by a neutral third party. The mediator is usually trained in specialised communication and negotiation techniques. The goal is for both parties to resolve the dispute and repair any business relationships. Any decision could be legally enforceable.

What are the Pros and Cons of Using Each?

Challenges of using litigation

Litigation can be costly – both financially and reputationally. When companies go through a public lawsuit, this can affect their image, deterring investors, consumers and potentially damaging existing business relationships with suppliers.

Similarly, if a dispute is not resolved quickly, court costs and legal fees can stack up. Often, due to the complexity of the disputed matters, cases can take months, or even years, to be decided by the court, leaving both parties with long periods of uncertainty.

Benefits of litigation

Litigation’s public record could be an advantage too: there is no guarantee that the company’s conduct will remain private. There could easily be a leak and a company may be looked upon more favourably if it is publicly taking steps to address the issue.

Litigation also provides a clear answer for the parties to the deal. When litigation goes through the courts, precedence is considered meaning parties enter the process well-informed of their chances and predicted outcome. Furthermore, judgements obtained through litigation compel parties to comply, or they could face penalties.


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Challenges of arbitration

Some companies are reluctant to use arbitration due to its lack of transparency. The process is still kept fairly secretive, and companies are less informed about the outcome of the dispute.

Another drawback of arbitration is its questionable objectivity. Critics often point to the risk of abuse, where an arbitration forum may depend, for its income, on the bigger party in order to generate repeat business.

Arbitration also presents limited avenues for an appeal. If the arbitration is mandatory and binding, the parties waive their rights to access the courts and have a judge decide the case. This, of course, will benefit one party but limited recourse for appeal could lead to an unfair decision.

Benefits of arbitration

The inability to appeal a decision can also count as a benefit, because it provides both parties with a certain end to the dispute. This often comes much faster than a court decision in litigation, so can be a much cheaper way of resolving the dispute.

However, Arbitration’s main advantage is its private nature. This means any documents or information revealed during the course of dispute resolution must be confidential and is kept out the public eye. This can benefit a company in maintaining their public image.

During arbitration, if the parties are in agreement, they can appoint a particular arbitrator with an appropriate degree of expertise. This is useful in highly technical disputes. In litigation, however, a judge cannot be chosen in any way. Similarly, because the parties are able to choose important elements such as the applicable law, language and venue of the arbitration, they can ensure no party enjoys a ‘home court’ advantage.

Lastly, the New York Convention 1958 has made it easier for arbitration awards to be enforced in other jurisdictions. Enforcing a court judgement in other nations still follows a complex and lengthy process.

Challenges of mediation

One risk of mediation is that it relies on both parties’ willingness to mediate and compromise, so they agree to a resolution. If one party is reluctant to cooperate, this can lead to an ‘empty chair’ scenario and could further fracture the business relationship.

Mediation agreements are not always automatically enforceable as the parties are only compelled to follow a decision if a court order is issued. This means the parties do not have as much certainty as they would with a litigation decision. This risk can be eliminated though if the parties, in their agreement to mediate, stipulate that any written mediation decision will be legally binding.

Furthermore, it is not guaranteed that mediation will save time or money. Some issues are not easily and quickly resolved, especially where the parties have an inexperienced or ineffective mediator.

Benefits of mediation

One benefit of mediation is that it avoids an ‘all or nothing’ decision, the likely result of using litigation. In mediation, one goal is that both parties can walk away with a ‘win’. The mediator will engage with the ‘interests’ of both parties, in a bid to find a balanced resolution. In turn, the mediator has opened channels of communication within the two parties which can preserve or even enhance their business relationship.

When mediation is performed effectively, disputes can be resolved speedily, meaning both parties save time and money. Plus, like arbitration, mediation remains a private dispute resolution so both parties avoid negative press attention. It also has access to a wide range of remedies, many of which would not be found in a court.

Where Are the Global Centres for Arbitration?

Where disputes arise between parties of different nationalities, it can be beneficial to agree to a foreign award in order to avoid the home court advantage scenario. This is where the parties agree for a decision to be issued by an overseas arbitral tribunal.

The five most popular global centres for arbitration are:

  • Singapore
  • Hong Kong
  • London
  • Paris
  • Geneva

When asked why they have chosen these venues, parties state that each location has a strong rule of law. They follow legislation based on the UNCITRAL Model Law, which means there is greater certainty over the outcome of the dispute. Furthermore, these locations have a specialism in a particular sector, a supportive judiciary and a history of disputes remaining confidential.

There are some differences though between the centres, though. For example in 2018, Hong Kong’s International Arbitration Centre introduced a new rule to impose a deadline for the delivery of awards, meaning the parties can manage costs more effectively.

A common advantage listed for London is English law’s principle of freedom to contract, which means the parties’ wishes are more likely to be upheld.

Furthermore, the centre in Paris makes it very difficult for one party to set aside an arbitral award, instead favouring immediate enforcement. These differences mean the parties must agree which forum would be best suited to resolve their dispute.

These five centres are facing increasing competition from New York and Dubai, so the arbitration landscape could differ over the coming years, particularly if any one arbitration centre establishes a specialism in technology or cybersecurity.

What Does the Future Hold For Litigation and Dispute Resolution?

Analysts believe that alternative dispute resolution will continue as a popular way of resolving disputes between parties. The huge advantage of privacy over litigation is particularly attractive for many parties.

Similarly, throughout the pandemic, ADR has been performed virtually and has worked successfully, even decreasing the costs for the litigation parties. There are even arguments that parties may be able to stipulate in their agreement in arbitrate or mediate that this will be performed as online dispute resolution.

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