Are Arbitration or Litigation Better to Handling Disputes?
The question whether to use arbitration or litigation in China for any particular dispute is not a simple one of choosing one over the other. Before deciding which to use there are 9 key areas to consider which include 1) nature and size of the dispute, 2) location, 3) pre-trial/discovery, 4) time, 5) confidentiality, 6) appeal or no appeal, 7) compromise, 8) decision maker, 9) cost. They are defined as follows:
1. Nature and Size of Dispute: Larger companies generally will choose litigation over arbitration because the amount of money in the dispute is larger. Cost of litigation may be the decisive factor when considering the possible outcome. Some cases are so small, or potentially small, that they may not be worth the time and effort involved in litigation and so you may choose arbitration. If the nature of the dispute is simple, arbitration would probably be the easier route. I know for my business, arbitration would generally be the best route since we are small and the amounts in dispute are likely not worth the likely litigation costs.
2. Location: One factor that must be considered; particularly in China, is where the litigation will be resolved. If the dispute is between two Chinese companies, then it must be resolved in China. In litigation you have some choice of where you can file the lawsuit. If you are a foreign company you could choose to resolve it in the United States or Hong Kong, or another foreign location. Generally you can sue where you are domiciled, even if you are a foreign company doing business with a Chinese company in China. Some courts in China especially in Western China, may not be as professional as others. Because of this, I would consider choosing arbitration there, instead of using the potentially flawed court system.
In arbitration both parties voluntarily agree to arbitration, so they both also agree to the arbitration location which must be correctly specified and included in the arbitration agreement from the outset. For example there is no Guangdong Arbitration Commission; it is called the Guangzhou Arbitration Commission. Article 16 (3) of the Arbitration law says “An arbitration agreement shall include arbitration clauses stipulated in the contract and agreements of submission to arbitration that are concluded in other written forms before or after disputes arise.(3) a designated arbitration commission.”1 This location listed must be legally valid and correct.
3. Pre-trial/Discovery: Arbitration does not provide for a real pre-trial phase for discovery as does litigation. With litigation you are under exacting rules for the gathering of evidence and disclosure of evidence%. For some disputes the pre-trial process maybe very important. For example%, if your case is very complicated your expenditure for% the pre-trial process may well be worth the extra cost it may require. If you need to be able to subpoena a witness to show clear evidence at trial, such as in a “whisle blowing” or corruption case, you will need to select the litigation process rather than arbitration which does not allow you to subpoena an unwilling witness. types of disputes, the legal strategy may be to wear down or bury the other side in paper work during the pre-trial phase. The expense of an expert witness may help you build a stronger case. All of these are reasons why a dispute may require a significant and expensive pre-trial phase. For many smaller to medium size business disputes, the pre-trial is usually not necessary. In a multimillion dollar dispute it could mean the difference between winning and losing a case.
4. Time: Time is a factor in deciding between litigation and arbitration. Litigation will generally take more time—possibly years. On the other hand, arbitration generally will settle the issue more quickly—certainly an advantage if time is very important.
5. Confidentiality: There is also a difference between the need for confidentiality of the outcome or the resulting public records available to everyone including the media. The outcome of arbitration is not public record and generally speaking litigation is. This means under litigation it will easier for the public to find out information about the dispute. There are many business disputes, both large and small, where disclosure to the public may damage both parties to the dispute. On the other hand, disclosure to the public of upcoming litigation may become the main reason for starting the litigation. It can serve as a warning to future potential violators that you will prosecute.
6. Appeal or No Appeal: Under arbitration there is no appeal, but under litigation you can appeal the decision. The award decided under arbitration is conclusive and binding on the parities. On the other hand for litigation an appeal is allowed, and may be an important consideration.
7. Compromise: The arbitration process encourages compromise—litigation does not. There is a social and public relations value to a company what can avoid unnecessary or damaging litigation. The United States, among all the countries of the world, has a reputation for excessive litigation—especially by powerful interests who win often by overwhelming the opposition. If both parties agree to arbitration ahead of time voluntarily, they both improve their public image. On the other hand with litigation a clear winner or loser is determined with the guilty or not guilty pronouncement at the end of the trial—which of course may be the desired outcome. For other types of cases the compromise aspect of arbitration may help the parties to re-build their business relationship and continue working together.
8. Decision-maker: Under arbitration the arbitrators are appointed by both parties and the parties can appoint the arbitration tribunal. It does not mean they can only choose someone on their side, but arbitrators need to be neutral. Article 30 states “An arbitration tribunal may be composed of either three arbitrators or one arbitrator. An arbitration tribunal composed of three arbitrators shall have a presiding arbitrator.” So the parties can decide if they will have one or three arbitrators and who they will be. In litigation you cannot choose the judge or the court. Judges are pre-appointed. The uncertainty may be an advantage or not depending on the type of issue.
9. Costs: Arbitration is very likely to be less expensive to both parties, especially when there is a quick resolution. Litigation can be extremely costly due to requirement of pre-trail/discovery and other aspects of the case. If a lot of money is at stake and you have a huge loss on your hands, you may need and want to pay for the costs involved in litigation.
Policies and procedures that avoid both arbitration and litigation works best, but when litigation may be required we prefer to purchase an insurance policy, when available, and shift potential litigation to receive support from our insurance company. The reality is for international business to potentially start a case in litigation can be very costly and time consuming. Even arbitration can be expensive, but since it is handled quicker it can be less devastating The fact is any type of dispute takes away from business.