Litigation v. arbitration

Updated: 08 May 2024

To litigate or to arbitrate, that is the question. Before we can answer that, still there are a lot of things to look at and to unpack in deciding which is favourable over the other.

In this article, we’ll be discussing key contentious points of litigation v. arbitration. Lawyers can use this article as an education piece to help their clients decide which of these approaches will work best for them.

Litigation v. arbitration: factors to consider

Parties in a commercial contract may be caught up in a dispute but are unsure whether to pursue litigation or arbitration. Answering the question of whether to litigate or to arbitrate is not as straightforward as it might seem for an in-house counsel.

There are numerous pros and cons to both strategies and there is no cookie-cutter solution to decide which is which. Individual circumstances in one case might call for arbitration, while different circumstances in a similar case might convince one to go to court.

Arbitration is considered faster, less expensive, and more private than litigation. Court cases, on the other hand, are more structured, tend to rely more on precedence, and can be readily appealed.

In a commercial context, virtually any type of contested contractual agreement can be arbitrated or litigated. This may include:

• conflicts in mergers and acquisitions
• lease renewals
• product defects
• disputes over the delivery of goods and services

To expand more on these pros and cons, below are major factors counsels may consider when evaluating which option is better, coming from industry experts.

Confidentiality

Privacy is often the most sought-after element of arbitration. Parties on both sides can avoid the glaring spotlight from the media and public access to the proceedings.

This works well in high-profile or contentious cases, where arbitration’s private proceedings will be more beneficial for parties.

While some provinces do not automatically guarantee the confidentiality of arbitration proceedings, parties may still agree to its privacy in their contract or arbitration clause.

The confidentiality rule in arbitration, or as provided in the parties’ agreement, may be disregarded when the case reaches court. This will also apply to the evidence or pleadings that parties submitted during the arbitral proceedings. 

This may only happen in certain instances, such as when court intervention is necessary to enforce the arbitral award. Still, parties are advised to include provisions on confidentiality when drafting arbitration clauses in their contracts. Otherwise, there would be no difference between litigation and arbitration proceedings when it comes to its confidentiality or privacy.

Expertise of the judge or arbitrator

While both judges and arbitrators are experts on law, arbitrators are more requested due to their specialization on specific matters.

Although arbitrators are usually retired judges, it’s not uncommon for retired lawyers to arbitrate cases. People in both professions understand the rules of engagement.

Richard Leipsic, former general counsel for Canwest Global Communications Corp., cited an example where “you’re not completely reliant on a judge to have accounting expertise [in arbitration].” 

“It’s not to say you couldn’t have experts present evidence, but it would be advantageous to have an accountant as an arbitrator, or as an adviser to the arbitrator.” This way, a party can have a better assurance of getting a degree of expertise on the case, he added.

In complicated financial cases, for instance, parties may include a provision that a specialist, such as an accountant, advises an arbitrator. “If you’re going to court, all you know is you’re going to get a judge.”

Parties may choose the best expert arbitrator/s to deal with the dispute. This is also why arbitration is preferred over litigation, because of the parties’ liberty in setting the rules of the arbitral proceedings.

In this interview, an independent arbitrator Julie Hopkins shares her journey in the role. She shares practical advice for aspiring arbitrators. The interview took place during the pandemic, so she also shares key insights into the benefits and challenges of virtual hearings:

Interested in knowing more about another arbitrator? Here’s a feature on Ian Binnie – former Supreme Court judge, litigator, and arbitrator.

Time to resolve the dispute

One of the biggest advantages of arbitration over litigation is that it’s faster. In arbitration, parties have more control over the step-by-step process.

When time limits are stated in their arbitration clause, these must be followed by the parties. This includes the appointment of arbitrators, sending out notices of arbitration, rendering the arbitral award, among others.

This contrasts with court proceedings, which are bound to certain periods set by law, and where trials may be scheduled months in between.

Leipsic doubted that arbitrations are necessarily faster than court cases. He has seen many arbitrators whose schedules are far more jam-packed than those of judges.

This may also depend on the availability of arbitrators per area, or the arbitral institution that parties submitted themselves to. So, while arbitration is less time consuming as per its structure, certain factors must be considered.

Costs of litigation and arbitration

It may be a tie when the battle of litigation v. arbitration is viewed as to its costs and other related expenses. Both are costly by their own standards.

Many people consider arbitration to be less costly than litigation, but that might be oversimplifying things. Both sides must pay their own legal fees, the arbitrator’s fee, and venue rent. However, in a trial, the judges don’t charge parties, and the courthouse is free.

“It’s a coin toss in terms of cost and timing,” Leipsic said.

Rules to govern the proceeding

In arbitration, both parties have a certain amount of control over the process. That can play a role in setting the ground rules for the proceedings.

For example, parties in an arbitration can decide on:

• the number of arbitrators
• the date and place of the proceedings
• court rules that will be adopted during the arbitral proceedings
• methods of presenting evidence and affidavits
• rules regarding the award and its non-compliance

Parties can skip strict court rules and procedural requirements in litigation when defining their own rules of arbitral proceeding.

Unset rules as a downside

Angela Avery, former senior solicitor at ConocoPhillips Canada, said that the bloom has largely come off the arbitration rose in the last 15 years.

“Everybody used to be really keen on arbitration and thought it was the panacea for business disputes. That view has changed over time; people are more skeptical that it is so far superior to litigation,” she said.

Avery also said that lawyers used to prefer arbitration because it seemed like an expedited process where you could avoid lengthy and unhelpful discovery.

Unfortunately, if you don’t have a properly agreed-upon arbitration process, you can end up doing just as much or more discovery, she said. “If the rules are silent or you haven’t agreed to rules, the arbitrator can act just like a court in ordering just as much production as you’d typically have [in court] anyway.”

Rules on setting the number of arbitrators

Laying out the rules for the number of arbitrators may also be an advantage for one of the sides in arbitration.

If a party has the stronger case and they’re confident they can get an impartial arbitrator, a panel of one is preferred. “Three is administratively more challenging. Oftentimes the chair is selected by the stronger arbitrator, so if you pick the weaker arbitrator, it’s kind of stacked against you already,” Avery said.

She also said that the time and cost savings are often a red herring in arbitration because litigation often settles the issues the arbitrator is entitled to decide. “You could be in court for years determining what the arbitrator can decide before you go back to the arbitration.”

Appealing an arbitral award

Arbitral awards are usually final and can’t be appealed. In court, however, a party has no assurance that an appeal will not be filed. It can be a double-edged sword, according to Leipsic. “It cuts both ways. Arbitrators often make decisions where they come to the wrong conclusion, but you must live with it.”

Compare that to litigation, where an adverse decision may still be appealed to a higher court.

Cross-border disputes

When commercial disputes involve transnational parties, or who are residents or citizens of another jurisdiction, arbitration may be better compared to litigation.

As global commerce continues to expand, arbitration is increasingly used to settle disputes that cross international borders. N either side wants to rely on the judicial system of the other, Leipsic said.

“It’s a growth industry. You’d expect to have more disputes by virtue of the increase in economic activity.”

Cross border disputes may also result in international arbitration. Watch this video to know more about it, how it works, and its advantages:

Check out our Special Report on Canada’s Top 10 Arbitration Chambers and how those firms made it to the list.

Tactical and practical considerations

There are also tactical elements to consider before choosing a resolution strategy, Jonathan Kroft said, a partner at Aikins MacAulay & Thorvaldson. It includes the relative positions of the parties and the nature of the disputes that are likely to arise.

For example, it may not be advantageous for one side to have its dirty laundry aired in a courtroom in front of reporters and cameras. “If they’re sensitive to publicity, and you’re prepared to go to court and they’re not, then you may actually have an advantage in negotiating the terms of the dispute.”

Resolution of the case over ‘justice’

Kroft said litigation is more of a one-size-fits-all approach, as there are court rules that must be followed. The scope for flexibility and tailoring your dispute resolution process is more limited.

“In a commercial context, it may be that parties say the resolution of a dispute done quickly, cheaply, and privately is more valuable to them than the perfection of justice,” he said.

How should an arbitration agreement be negotiated?

While most in-house counsel focus on the arbitration-versus-litigation question, an often-overlooked element is what should be negotiated into an arbitration clause, Kroft said.

Problems can arise when the clause is drafted during the honeymoon phase and both sides are optimistic about a successful partnership, he added.

“It’s a downer to think about the potential that the relationship is going to go badly. Frequently, the parties are suffering from deal fatigue. They’ve negotiated the deal, and the arbitration clause is sometimes put in with little thought.”

Sometimes, it’s a boilerplate problem. “[The lawyers] haven’t really examined whether arbitration is appropriate, and if it is, what form of arbitration is appropriate.”

Kroft mentioned some important points for lawyers to consider when preparing an arbitration clause:

• what sort of disputes might arise in a commercial transaction
• what attributes of arbitration are advantageous or problematic in each individual case

Are arbitration clauses enforceable against third parties?

There are times when a disagreement will end up in court even with an arbitration clause, Kroft said. For example, if two parties join forces to provide a certain service to a third party, a dispute could arise over who is responsible for any damage sustained by the customer.

“Unless they consent to arbitration, you can’t force the third party to arbitrate if they’re not part of the arbitration contract. You end up in court anyway.” This also means that, while an arbitration clause is enforceable in Canada, it’s necessary that a party being compelled has previously agreed to be bound by the same clause.

Deciding on litigation v. arbitration

So, to litigate or to arbitrate will really depend on the above-mentioned factors. Scrutiny of the subject case (and the contract) is necessary because each case is unique. It’s important to consult a lawyer with vast experience in alternative dispute resolution.

Whether it be litigation or arbitration, what matters is that issues are resolved, and parties can continue with their business.

Reach out to the best commercial arbitration lawyers in Canada as ranked by Lexpert.