When entering into a contract, parties typically want to focus on the positive value that the contract creates. However, this value will depend on whether the contract is properly performed. And the performance of the contact is safeguarded by the dispute resolution mechanism.

The default dispute resolution mechanism in most jurisdictions is litigation. However, this is not the only choice. Arbitration may serve as an alternative. The question is what to consider when making the choice?

There is no uniform answer to this question, as each legal relationship is different. Nevertheless, considering the following eight characteristics of arbitration may help in the decision-making process.

1. Confidentiality of arbitration: Depending on the jurisdiction, information about ongoing court proceedings might be public. For example, in the United States not only the judgments but also the parties’ filings may be available to a third party. On the other hand, arbitration proceedings and arbitral awards are typically private, unless the court gets involved in the post-arbitration proceedings.  
2. Flexibility of arbitration: In principle, parties have a significant discretion in deciding procedural rules of the arbitration, arbitrator selection process, the place of arbitration, and scope of arbitral tribunal’s powers. In litigation proceedings, the parties must comply with the civil procedure rules and have no impact on the choice of judge hearing their case.
3. Speed of arbitration: Arbitration may be swifter than court litigation, as typically arbitration is a one-instance procedure. Moreover, as arbitration awards are usually final and binding, with limited grounds for appeal, this may reduce the risk of prolonged disputes.
4. Neutrality of arbitration: In cross-border disputes parties may be worried about a potential bias of the courts located in the same country as the other litigant. Arbitration allows to minimize this risk, by holding the arbitration proceedings in a neutral forum with arbitrators not connected to the parties’ countries.
5. Cost of arbitration: In some cases, arbitration may be more cost-effective than litigation. In particular, this may be true when the litigation would require the parties to go through a lengthy discovery phase. However, the costs will depend on the specific circumstances of the case, including the number of arbitrators, their fees, or fees of arbitral institutions (if involved).
6. Limited Appeal Rights: The finality of arbitral awards can also be a disadvantage in case of complex disputes, if a party feels that the arbitrator did not properly establish the facts or misinterpreted the law. The grounds for setting aside the award are limited—in most countries the error of fact or law will not be enough to overturn the arbitral award.
7. No Formal Discovery Process: Arbitration usually has a more limited discovery process than litigation in the United States. This means that, in most cases, a party must be ready to present its case based on the evidence it itself possesses. However, the parties may agree to a full formal discovery process in their arbitration agreement.
8. Enforcement Challenges: Arbitral awards are generally binding on parties. However, if a party does not comply with it, enforcement or recognition of the award may be necessary. International awards are in general enforceable under international treaties such as the New York Convention[1] or the Panama Convention.[2] These treaties are intended to make the enforcement proceedings efficient. Nevertheless, the proceedings will not be confidential and there are several grounds on which a party may attempt to challenge the validity of arbitral awards in these proceedings.

The above list is not exhaustive, but it is a good starting point for parties wanting to agree on a dispute resolution mechanism crafted for their legal relationship. Parties wanting to conclude an arbitration agreement should consult with a lawyer specializing in the field of arbitration, who will be able to prepare a solution suitable to their needs.

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[1] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 3 (New York Convention).

[2] Inter-American Convention on International Commercial Arbitration, Jan. 30, 1975, O.A.S.T.S. No. 42, 1438 U.N.T.S. 245 (Panama Convention).