N. Pirilides & Associates LLC


Offering high-quality and effective legal advice



Dispute Resolution Clauses: The Pros and Cons of Litigation and Arbitration in Commercial Disputes

Placed at the back end of commercial agreements and in most (if not all) of the cases not the subject of lengthy negotiation between the parties, are dispute resolution clauses. Simply because they are at the end of a contract by custom does not mean that they should be relegated to the end of the list of important provisions since they can become critical in the event of a dispute as things can and do sour in many transactions. Therefore, such clauses should be considered carefully and be given a real thought from the early drafting stage. 

With the above in mind, the most common question when drafting a dispute resolution clause is which forum to choose for the resolution of any dispute arising under the agreement, with the usual rivalry being court litigation or arbitration? The answer to this question can radically affect the outcome of a dispute and can make a major difference in how a dispute is resolved, thus making the decision even more important. In deciding between the two, an understanding of the advantages and disadvantages of these different forums is of essence and therefore below we will try to summarise the key pros and cons of both forums. 

For starters and before elaborating on this debate between the two, it is important to understand how a dispute resolution clause works: In a nutshell, the parties of an agreement have the option to choose for any dispute arising under or in connection to the agreement to be decided either by the national courts (for example, the Cyprus courts) or by an arbitral tribunal. When it comes to the dispute resolution clause itself, the general principle is that such a clause should be clearly drafted and unambiguous since the courts will endeavour to give effect to the parties’ agreement on how they wish to resolve their disputes, but if such an agreement is not clear because of poor drafting, parties could find themselves in a different forum to the one they chose. 

Recent years showed that most of the parties in a commercial agreement prefer for their contractual related disputes to be submitted to arbitration. However, there are still many who maintain a more conservative and traditional approach, choosing litigation over arbitration, because the latter lacks facets of the procedural and legal structure of the former and because they believe that only litigation will ensure an outcome that is truly premised on the facts and the law. 

Admittedly, there are potential advantages and disadvantages to either forum, depending really upon the nature of the dispute. Below, we have set out a comparison between litigation and arbitration, highlighting the most important factors for the parties to consider when deciding whether to opt for arbitration or litigation. 

  1. Time/Speed: Litigation is notorious for moving at a glacial pace whereas arbitration typically provides a speedier resolution than proceeding in court. Unlike court trials, which must be worked into overcrowded court calendars, arbitration hearings can usually be scheduled around the needs and availabilities of those involved, including fixing hearings for evening times, making the final determination of a dispute through arbitration speedier. Moreover, because there is typically less formalized procedure throughout an arbitration, there is less potential for competitiveness to slow down the process.
  2. Flexibility: Litigation is formal, while arbitration is flexible. The former is largely controlled by legislative and procedural rules whereas in the latter, through provisions set forth in the agreement or upon mutual agreement of the parties once arbitration has commenced, the parties have the opportunity to establish rules and limits for both the pre-hearing and the hearing on the merits stage of the proceedings.
  3. Costs: In most jurisdictions, litigation tends to be more expensive than arbitration, though in Cyprus there is no clear cut answer to this question and it all depends from the particular dispute. Generally speaking, arbitration is becoming more expensive as more entrenched and more experienced lawyers, with high rates and fees, are usually involved. On top of that, the parties have to pay the fees of both the arbitrator(s) as well as the fees of their respective lawyers and this inevitably increases significantly the costs of the whole arbitration process.
  4. Arbitrator / Judge: In all fairness, the soundness of any adjudication is mainly dependent upon the quality of the arbitrator or the judge. The main difference is that in the arbitration process, the parties have the option to select the arbitrator(s), who ordinarily will be the same from the beginning until the end of the process and usually they have the required expertise to resolve the dispute, whereas in litigation, no individual judge is assigned throughout the case and usually multiple judges may be involved in adjudicating the pre-trial issues and the case on its merits. Furthermore, the judge is assigned by the court without input from the parties.
  5. Rules of Evidence & Procedure: The often convoluted and complex rules of evidence and procedure in litigation do not apply in arbitration proceedings, making them less stilted and more easily adapted to the needs of those involved.
  6. Appeal Rights: An arbitration award is final and binding and, in many jurisdictions, there is a limited right of appeal. That gives finality to the arbitration that is not often available with a trial decision, which may be subject to appeals and re-trials.
  7. Privacy: Arbitrations are closed whereas court proceedings are open to the public.
  8. Market knowledge: If a dispute is likely to raise technical or scientific issues of fact, arbitration permits the parties to choose a tribunal with the relevant technical expertise whereas in litigation you may have a trial before a judge who has no such knowledge and has to have explained at length (and cost) through the testimony of expert witnesses.

The drafting of an agreement typically occurs at a time when the parties are focused on commercial opportunities and the prospects of a successful agreement, and not what will happen if things don’t go as planned, though things can and do sour in commercial agreements, making the consideration of having a clear dispute resolution clause in the agreement a must! It is evident from the above that both arbitration and litigation have their pros and cons. The preference between them depends on the business relationship at issue and the type of dispute that is likely to arise. Before simply passing over the dispute resolution clause, which most probably you will consider as just another unimportant or standard provision, consult with our team of experts to determine the right choice for you.