ARBITRATION - House of ill dispute
What's a company to do when one of it's debtors doesn't pay up? Stick with us and we'll guide you through it.
Every year, thousands of businesses in the UK go belly up simplyStick with us and we'll guide you through it. because they do not get paid on time - if at all - for goods or services provided. So what course of action is open to you when you have a huge dispute with one of your most valued trading partners over money it owes you? The sum involved is considerable and you have tried to recover it through your usual procedures. Debtor Ltd, the company that owes the money, disputes the fact that any payment is due and says you have failed to measure the work it performed properly.
Relations between you and Debtor Ltd are becoming strained and you can't decide whether to go in hard and demand payment or take the softly-softly approach and maintain good commercial relations. You're concerned that if you bring in the lawyers, before long the situation will be out of your control and costing you a fortune.
A speedy commercial decision is required, but what's the best way to recover your cash? There are three main ways to resolve a dispute - litigation, alternative dispute resolution (ADR) and arbitration.
Litigation has its advantages. If you believe Debtor Ltd has no defence, you can short-cut the usual procedure and apply to the court for a summary judgement. Should you subsequently discover that your claim is not only against Debtor Ltd but also IOU Ltd, the courts have the power to bring IOU Ltd into the action at almost any stage.
The disadvantages are well known. Litigation can be time-consuming, expensive and very public. A writ is open to inspection by the general public and once issued and served, it usually signals the end of a commercial relationship.
As a result, ADR has been promoted in as an antidote to rising costs and delays in litigation.
It offers flexibility, but an award can be difficult to enforce because the parties are not necessarily bound by it. ADR does not guarantee a result, because the mediator can only facilitate the parties' agreement.
The final option is old-style arbitration. It used to offer a quick, confidential, cost-effective means of resolving a dispute, conducted by an arbitrator with expertise in the field. The watchword of the system was flexibility, allowing the arbitrator to be involved from the outset, review the evidence and make a speedy award. But, unfortunately, the patchwork of legislation and judge-made law that governed the development of arbitration wiped out its main commercial advantages - speed and cost-efficiency.
The Arbitration Act 1996 has set out to redress the balance.
People involved in arbitration have tried to codify both the statutory and judge-made law already in place, using the opportunity to introduce some changes. The changes range from reducing the role of the courts to altering the role of the arbitrator. There is also a distinction between the functions of mandatory and non-mandatory provisions of the act.
So, back to your dispute. Debtor Ltd is a sizeable concern and known for producing quality products. You have an excellent reputation in the market and may need to trade again with Debtor Ltd in the future. Relations are strained, but you are still in contact.
There is no arbitration clause in your contract with Debtor Ltd. If there was, the act would leave you no choice but to arbitrate. If you put in an arbitration clause, the courts are unlikely to allow you to litigate.
Litigation may result in the recovery of your money, but all your competitors will know the details of the dispute and any future trade with Debtor Ltd will be affected. ADR is a good alternative, but Debtor Ltd is not obliged to abide by the decision unless you sign a formal contract, so you could be back at square one.
Arbitration, however, will allow you to resolve your dispute in private and could salvage your business relationship with Debtor Ltd at a later stage.
Having decided on arbitration, there are options as to how you go about it. You can opt for an ad hoc arbitration - conducted in accordance with the terms of the act - and agree with Debtor Ltd on how to proceed,or you can follow a set of rules devised by the established arbitration institutions.
If you decide on the ad hoc method, you will be drafting an arbitration agreement with Debtor Ltd. You choose a mutually acceptable arbitrator, deal with a few procedural points and, together with Debtor Ltd, sign the agreement. A word of warning - some provisions of the Arbitration Act operate in default of a contrary agreement. By failing to consider some of the provisions, you could find that the arbitration is adversely affected.
Jane Player is a partner and Sarah Walker an assistant solicitor in the commercial litigation group at Dibb Lupton Alsop.
SIX TOP TIPS TO HELP YOU THROUGH ARBITRATION
Consider the law that should be applied in the arbitration
Section 46 of the Arbitration Act 1996 liberates the tribunal from the constraints imposed on it by the Rome Convention. The parties can agree that the tribunal can decide the matter on other terms than in accordance with English law. In the absence of such an agreement, the tribunal must apply the usual conflict of laws rules.
Consider whether you wish to allow your opponent the possibility of receiving compound interest
Section 40 of the act allows the tribunal to rule that compound interest is due on an award, in the absence of an agreement between the parties the tribunal has no such power.
Consider costs at the outset
You can agree no allocation of costs or make another agreement. You can agree that the arbitrator deals with all such matters, to include taxation. This prevents any party applying to the High Court for taxation of costs.
Section 65 of the act gives the tribunal the power to cap costs. The parties need to consider whether to prohibit such a power. It may be desirable for a financially weaker party, but the winning party may find its own irrecoverable costs negate the benefit of any award.
Consider whether you wish the tribunal to have the power of appointing experts
Section 37 provides the tribunal with the power to appoint experts, the cost of which must be borne by the parties. To ensure the tribunal cannot do this, an express agreement must be reached between the parties.
Consider whether you require the tribunal to make provisional awards
If a lot of money is tied up in the determination of a single issue in the arbitration and you require the tribunal to decide this issue and make an award during the course of the arbitration, this power must be expressly given.
Consider the issue of confidentiality
The 1996 act omitted the complicated issue of the implied duty of confidentiality.
Privacy does not mean confidentiality, so there are exemptions. The first is when the production of documents or witness evidence from one arbitration is necessary to protect the rights of a party in another arbitration.
The second is when it is in the public interest to do so. parties to an arbitration may wish to include an express provision of confidentiality.
You and Debtor Ltd may choose to arbitrate in accordance with the rules of one of the arbitration institutions. You will be bound by the rules in so far as they are mandatory. Although many of the institutional rules have been amended, differences remain and it is advisable to consider them carefully before agreeing to be bound by them.