When businesses enter into commercial agreements with each other, they do so in anticipation of the benefits they will enjoy from them. What happens if things go wrong, and either party fails to honour its commitments, is often not, understandably, at the forefront of their minds. 

However, it is an important issue to consider before the deal is signed. After all, contracts are there to give each party security: security that if the other party fails to honour its commitments, you have legal redress and can enforce the contract.

In this context, one important question is the means through which any future contractual dispute should be resolved, if the parties are unable to reach an amicable settlement. The traditional means is by court litigation. 

However, there are alternatives. Two of the most popular are arbitration and mediation. This article considers how they compare with court litigation. It is important to consult your lawyer on the best means of settling any future disputes in your case, before the deal is signed. 

Arbitration

In arbitration, instead of one party taking legal action in court against the other to enforce the contract, the parties agree to appoint one or (more usually) three arbitrators to resolve their dispute, and to be bound by the arbitrators’ decision, which is legally enforceable. Arbitrators are usually, but need not be, lawyers. 

While both court litigation and arbitration result in legally-binding, enforceable decisions by an independent third party, there are important differences. Some of the key ones are as follows:  

Confidentiality. While court hearings are normally open to the public, and court decisions are published, arbitral proceedings and decisions (or awards) are confidential.

Finality. While the losing party in a court case who is aggrieved by the decision can appeal to a higher court, and often also has a further right of appeal against that higher court’s decision, arbitral awards are usually final, and parties can challenge the award in a court only in very limited circumstances. For example, in Hong Kong, parties have no right to appeal against an arbitral award unless they both agree that either can appeal on a point of law, or serious illegality. They can also apply to have the award set aside, on very limited (mostly procedural) grounds.

Informality and flexibility. Whereas court procedures on matters such as rules of evidence are largely pre-determined by fixed rules, procedures in arbitrations are more informal and flexible. For example, supporting documents can be attached to the parties’ submissions, avoiding the need for formal exchange of documents and discovery, the parties are free to agree with the arbitrators the venue for the arbitration, and witnesses can be interviewed at a location convenient to them.

Speed. It is often quicker to obtain a decision in an arbitration than in a court case, both because of the more informal procedures, and because a date for the arbitration hearing can often be set earlier than a hearing in a court case.

Choice of decision-maker. While the parties cannot choose the judge who will decide a court case, the parties in an arbitration can choose the arbitrators. This makes arbitration particularly attractive in areas such as construction and shipping, where a high degree of industry expertise on the part of the arbitrators is desirable.

The other party also has to agree on arbitration, if it is to be the chosen route for resolving future disputes. If, after obtaining legal advice, you decide to go for arbitration, your lawyer can advise on and negotiate the terms of the appropriate arbitration clause in the agreement. An important, and often contentious, issue in this regard, where the parties are based in different jurisdictions, is where the “seat” (location) of the arbitration is to be. For example, is it to be in the jurisdiction of one of the parties – and if so which one – or a “neutral” third jurisdiction?

Mediation

In mediation, the parties use a neutral third party (the mediator) to help settle a dispute between them. Unlike in court litigation or arbitration, the mediator does not make a decision that is binding on the parties. There is no winning or losing party. 

Instead, the mediator helps, through a process of discussion, to narrow the differences between the parties’ positions, and thereby enable them to reach an agreement between them to settle the dispute. As with arbitration, mediation proceedings are confidential, as are settlement agreements reached between the parties. 

Mediation is particularly popular in consumer contracts, or commercial contracts where the amounts at stake are relatively low, because it is more cost-effective than court litigation or arbitration if the mediation is successful and a settlement agreement is reached. However, it does not preclude either of these outcomes if the mediation is unsuccessful and no settlement agreement is reached, which potentially increases costs in this scenario.

It should be noted that the courts in Hong Kong – and in other jurisdictions – actively encourage mediation as a first step in any commercial dispute, in an attempt to avoid court litigation. For example, if a party unreasonably refuses a request by the other party to settle a dispute by mediation, and the first party wins in a subsequent litigation, it may not recover all of its legal costs in the legal proceedings, due to its refusal to mediate.

Conclusion

Choosing the most suitable mechanism to address any future contractual disputes is an important matter to address before signing any commercial agreement. Businesses should obtain their lawyers’ advice on this issue, as well as drafting the contractual provisions to put the appropriate mechanism in place.