International arbitration v cross-border litigation: The pros and cons

While emerging as a vital force in the global economy in recent years, Chinese enterprises have in tandem faced ever-increasing cross-border commercial disputes.

The choice of dispute resolution method consequently merits serious attention and, among those methods of settling international commercial disputes, arbitration offers an array of advantages over litigation.

Advantages of arbitration

High enforceability. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) was adopted in 1958, and currently has more than 170 contracting states, including China. It covers almost all countries and regions with active international commercial activities.

Under the convention, each contracting state shall recognise and enforce all foreign arbitral awards unless a declaration of reciprocity and a commercial reservation has been made when signing the convention. This ensures the enforcement of international arbitral awards in these contracting states.

However, for court judgments there is no globally influential convention for mutual recognition and enforcement.

Whether a court judgment of one state can be recognised and enforced in another state depends on the existence of a bilateral treaty on judicial assistance, or a reciprocal relationship, which leaves a high level of uncertainty regarding cross-border recognition and enforcement.

Confidentiality. In international commercial disputes, litigants usually do not wish to attract publicity. Confidentiality is therefore a major consideration when choosing the method of dispute resolution, and is provided for in arbitration rules of major institutions of international commercial arbitration.

Without litigants’ consent, arbitration proceedings and their substantive content will not be publicly disclosed. On the contrary, public hearings are a common feature of civil litigation in various countries, making the parties’ involvement and relevant judgments readily available through public channels.

However, confidentiality of arbitration is not absolute. Arbitration proceedings often require the assistance of judicial proceedings – such as jurisdictional challenges, interim injunctions and enforcement of arbitral awards – in which certain information of disputes may still be made public to some extent.

Neutrality. In arbitrations, litigants are free to choose arbitration proceedings, the nationality of arbitrators, applicable substantive law, and the language and seat of arbitration. Especially by selecting a neutral country as seat of arbitration, parties can avoid the jurisdiction of courts in the located country.

Arbitration has many other advantages, such as autonomy of the will and procedural flexibility. Arbitration rules are more consistent across institutions, whereas litigation procedures vary significantly among countries. Parties can even choose to compose an arbitral tribunal of accomplished industry experts to render expert judgment.

Given all its benefits, arbitration has become the more common choice of dispute resolution in cross-border commercial transactions. However, in some cases, the enforcement power of court litigation better serves to protect the interests of the innocent party.

Advantages of litigation

Timely rights protection. In litigation, a party can apply for measures such as property preservation and interim injunctions before the final judgment. Courts will also pass rulings within a short period. This can put pressure on the opposing party and increase the certainty of future enforcement of the judgment.

Additionally, in debt disputes, if the claim is not substantially disputable, the creditor may bring a liquidation or bankruptcy procedure directly against the debtor. The procedure is relatively quick, and the court can usually convene a session and make a ruling promptly.

Once the debtor is adjudged to be in liquidation or bankruptcy, the court will immediately appoint an administrator to take over the debtor’s property.

In comparison, applying for property preservation and interim injunctions in international arbitration proceedings may be challenging. Whether an interim or interlocutory award – such as property preservation or interim injunctions – made by an offshore arbitral tribunal can be recognised and enforced in the respondent’s country is still subject to that country’s legislation and judicial practice.

High efficiency. Litigation can resolve a series of disputes involving multiple subjects and agreements all at once. As arbitration adheres to the principle of autonomy of the will, it is difficult to include a third party who has not signed the arbitration agreement, potentially leading to parallel litigation and complicating the dispute resolution process.

The litigation procedure, by contrast, can resolve commercial disputes involving multiple parties and related agreements simultaneously, improving efficiency and facilitating a quicker reconciliation.

While many experts emphasise the advantages of arbitration, such as a single and final award saving costs and time, in practice this is not necessarily the case.

In international commercial arbitration, there is no standardised fee for arbitrators. Prevailing billing methods include fees based on disputed amounts and hourly rates, which are generally higher than litigation. In addition, a case acceptance fee should be paid to the arbitration institution, making the preliminary cost of arbitration likely to be higher than litigation, unless a party continues to appeal and undergoes a first, second or even third trial.

As stated in The Art of War, an ancient Chinese military treatise, water retains no constant shape, and in warfare there are no constant conditions. When a commercial dispute arises, much remains to be considered to make the right choice between arbitration and litigation.

Hu Hongwei is a senior partner at Dacheng Law Offices. He can be contacted on +86 21 3872 2019 or by email at hongwei.hu@dentons.cn

Tan Shaoxuan is a paralegal at Dacheng Law Offices. He can be contacted on+86 21 3872 2435or by email at shaoxuan.tan@dentons.cn