There are fundamental differences between international arbitration and litigation in the U.S. courts that can impact the cost of resolving your dispute, the time to resolution, and each party’s respective level of comfort with the process. Below, I set out a few important distinctions between the two processes.
1) Neutral selection. In arbitration, the parties select the neutral arbitrator(s) who will decide the dispute. (Or, at a minimum, the parties select the method by which an arbitrator is to be chosen.) Depending on the case, parties can seek an arbitrator with substantive knowledge of a particular issue, fluency in a foreign language, availability to hear the case on an expedited basis, and so on. Parties can even interview potential arbitrators, subject to certain restrictions. When litigating in U.S. courts, one rarely has control over which judge is assigned to the case.
2) Neutral compensation. Parties to an arbitration pay their arbitrator(s), whereas American judges’ salaries are paid by the government. Arbitrators’ hourly fees run the gamut from a few hundred dollars to more than one thousand dollars. Arbitrator fees can be substantial, particularly in cases with multiple arbitrators or where arbitrators are required to travel to several hearings. These costs can be minimized by conducting hearings by teleconference or videoconference and agreeing that the chairperson of a three-person arbitral tribunal will decide certain preliminary matters without consultation with his or her co-arbitrators.
3) Filing fees. The fee required to file a new case in a state or federal court in the United States is typically a few hundred dollars paid to clerk at the time of filing. In contrast, international arbitration filing fees are often tied to the amount of damages claimed and thus can reach well into the five figures. These fees go to the dispute resolution agency and finance its administration of your case. Counterclaims and third-party claims incur filing fees as well. Arbitration filing fees do not apply towards arbitrator fees.
4) Scope of discovery. State and federal courts in the United States allow wide-ranging discovery. Federal Rule of Civil Procedure 26 sets the scope of discovery as “…any non privileged matter that is relevant to any party’s claim or defense…” Discoverable material need not be admissible at trial. Litigants — particularly litigants hailing from another country — are often surprised at the scope of pretrial discovery allowed in U.S. courts.
International parties may feel more comfortable in arbitration, where the scope of discovery is limited. Moreover, the cost savings associated with curtailed discovery are undeniable. While it is impossible to state a universal discovery standard applicable to international arbitration, parties to an international arbitration can be assured that the starting point is not “any nonprivileged matter that is relevant to any party’s claim or defense.” Many international arbitration agencies have promulgated rules or guidelines discouraging the use of United States-style discovery international arbitration proceedings. Arbitrators often require parties to make their case for disputed discovery requests before propounding the request on the other party, which operates as a de facto limitation on the scope of discovery in arbitration. Particularly in the early stages of a case, parties will not pursue unnecessary, burdensome discovery because they are concerned about building their credibility with the arbitrator and fear that going on a “fishing expedition” will draw the arbitrator’s ire.
5) Discovery methods. In the same vein, the methods used to discover evidence international arbitration are limited as compared to discovery tools used in litigation in U.S. courts. Depositions are not commonplace international arbitration, but they are routine in litigation in the United States. American discovery mechanisms such as interrogatories and requests for admissions are not generally permitted international arbitration.
6) Time to judgment or award. On average, cases in the U.S. court system take significantly longer to decide than disputes resolved by international arbitration. For instance, in Massachusetts state court, an “average-track” case should take three years from the time of filing to the issuance of judgment. A “fast-track” case should take just under two years. According to federal court management statistics, the median time from filing to trial in the U.S. District Court for the District of Massachusetts was approximately 27 months for civil cases that went to trial between September 2013 and September 2014. That puts the District of Massachusetts right near the median for all U.S. District Courts. These metrics are limited to U.S. trial courts; an appeal can add years onto the timeline.
It is impossible to state a uniform “time to resolution” for cases submitted to international arbitration proceedings, and the timeline depends to a large degree on (1) the complexity of the case, (2) the parties’ commitment to a quick resolution, and (3) the arbitrator’s calendar. With the exception of the first factor, the elements dictating time to resolution are within the parties’ control. If a quick resolution is important, parties should make serious inquiries into candidates’ availability during the arbitrator selection process. Too often, it is in one party’s interest to slow down the proceedings. This tactic will be less successful international arbitration than in U.S. courts for two primary reasons. One, discovery — which consumes a huge portion of the calendar in any U.S. court case — is limited in arbitration. Two, every major arbitral institution touts efficiency as an advantage of resolving disputes by arbitration. To maintain arbitration as a viable alternative to litigation, arbitration institutions have a keen interest in moving arbitrations along expeditiously. If the parties want a fast-tracked international arbitration, they will almost certainly get just that, provided that they have selected a reputable arbitrator and arbitral institution. Further, in most circumstances, an arbitrator’s award is final and not subject to time-consuming appeals.
7) Confidentiality. There is a presumption of openness in U.S. courts. The U.S. Supreme Court has stated: “It is clear that the courts of [the Unites States] recognize a general right to inspect and copy public records and documents, including judicial records and documents.” Nixon v. Warner Communications, Inc. 435 U.S. 589, 597 (1978). In most cases, anyone can attend a civil trial, the press can report on court filings and hearings, and the case file is available for review and copying from the clerk upon request. There are methods of impounding or sealing judicial records in the United States, but the proponent of such a request bears a heavy burden. By contrast, except in a few specific circumstances (e.g., some investor-state disputes), international arbitration hearings are private, and the agency and arbitrator(s) are bound to keep filings confidential. Parties to an international arbitration should negotiate a confidentiality stipulation limiting party disclosure of information exchanged during the arbitration.
8) Procedural flexibility. Many years ago, the Supreme Court of Pennsylvania said (and it still holds true today): “The essence of arbitration is its freedom from the formality of ordinary judicial procedure.” Canuso v. City of Philadelphia, 326 Pa. 302, 307 (1937). To that end, most arbitrators will permit the parties to agree on what procedures are appropriate for their arbitration. Arbitration rules are quite fluid and permit the process to be closely tailored to the realities of the dispute and the parties’ goals. As just one example, arbitrations are often bifurcated into liability and damages phases, which permits parties to settle the case after the liability phase, but before large sums are spent on damages experts.
By contrast, U.S. courts are not known for their procedural flexibility. American rules of civil procedure will be enforced. There is some room for creativity in U.S. courts, but by and large, parties will have more control over the process international arbitration.
9) Evidence. The U.S. Supreme Court has stated plainly, “Arbitrators are not bound by the rules of evidence.” Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 203 n. 4 (1956). What that typically means in the practice of international arbitration is that arbitrators will receive all of the evidence presented by the parties and accord it whatever weight they deem appropriate. Parties to an international arbitration should not expect evidence to be excluded on traditional grounds such as hearsay.
The means of presenting evidence international arbitration is also noteworthy. Direct testimony is often elicited through a written witness statement submitted prior to the arbitration hearing. The witness then appears in person or by videoconference for cross-examination. The side proffering the witness is sometimes afforded a brief “warm-up” period (usually no longer than 30 minutes) so that the witness may acclimate to the hearing atmosphere before cross-examination begins.
10) Joinder of parties. Imagine that your deal with Company XYZ requires you to ship products to Company XYZ in France via a third-party shipper who, as is often the case, is not a party to your contract with Company XYZ. If Company XYZ sues you in a U.S. court alleging that a shipment was damaged upon delivery, you might seek to join the shipper on theory that the damage was caused by the shipper’s conduct. So long as the court can exercise personal jurisdiction over the shipper, under most circumstances this form of impleader is permitted.
If, however, you have agreed to arbitrate your dispute with Company XYZ, you will need the shipper’s consent before it can be brought into the arbitration. Arbitration is contractual and a non-signatory to an arbitration agreement cannot be compelled to arbitrate against its will. To alleviate this problem, a parallel case is often filed in an appropriate court against the non-arbitrating parties and stayed pending arbitration. This is intended to preserve whatever claims may exist against the non-arbitrating parties while the substance of dispute is resolved in arbitration.
11) Enforceability of judgments/awards. International arbitration awards are enforceable in more than 150 nations pursuant to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. There is no similar treaty paving the way for the enforcement of U.S. court judgments in other countries.
12) Ability to appeal. The grounds for vacating an international arbitration award are extremely limited. Generally, a court reviewing an arbitrator’s award cannot “second guess” the arbitrator and can only vacate the award in egregious situations — e.g., where the arbitral tribunal acted outside of its authority or a party was not given proper notice of the proceedings. Court proceedings to confirm or vacate an arbitration award are typically dealt with in summary fashion — at least in U.S. courts. American court judgments, on the other hand, are appealable on much broader grounds, and the appeal process can take years.
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