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Newsletter 09/2017

Legal updates | Arbitration vs. Litigation

 

Differences between Arbitration and Litigation – What you should know.

When entering into any written transaction, you would likely find that it contains a provision regarding the method of dispute resolution, which would usually be either arbitration or litigation. In this regard, you would be unlikely to object to whatever dispute resolution method is mentioned in the provision, if you have not had much experience with disputes, and you will be unlikely to afford much attention to this. Also, in this regard, it does not help that most lawyers tend not to explain the differences between the methods of dispute resolution and the significance of choosing one over the other, unless you specifically ask them to do so.

The purpose of this article is to give the reader, who may be about to enter into an agreement relating to the UAE (for example, the agreement is to be executed in UAE or the reader resides in UAE), a short guide on the differences between arbitration and litigation, with a focus on the arbitration centers and local courts of Dubai. However, this article is only intended as an overview, and should not replace seeking appropriate legal advice relating to the choice of dispute resolution for your particular situation as many exceptions exist and each agreement is unique. Therefore, I would strongly recommend seeking the advice of a competent UAE lawyer before you take any decision relating to the choice of a dispute resolution method.   

Before setting forth with the differences between arbitration and litigation, it is important to touch upon the basics of each dispute resolution method. In this regard, litigation is considered as the standard dispute resolution method. The UAE is a federation of seven Emirates and each Emirate has a Court of First Instance and a Court of Appeal. Further, there are three Courts of Cassation in the UAE – one for Emirate of Dubai, one for the Emirate of Abu Dhabi, and one for the other five emirates.  The UAE is a civil law country whereby the constitution and the laws are the primary source of law. While judgments of the higher courts can act as source of guidance to the lower courts, the latter are not bound by them. Further, judgments are rendered through judges and not juries. On the other hand, arbitration constitutes the agreement of two (or more) parties in a civil dispute to seek its resolution through arbitration instead of the normal dispute resolution method, which is litigation. Disputes are decided by an arbitral tribunal that is made of one or more arbitrators who render an award (decision). There are several arbitration centers in UAE. The arbitration centers in Dubai are the Dubai International Financial Center Arbitration Center (DIFC-LCIA) and the Dubai International Arbitration Center (DIAC).

Now, there are seven main differences between arbitration and litigation and they are the following: (1) Timeframe; (2) Influence on the Proceedings; (3) Costs; (4) Experience of the arbitrators and judges; (5) Enforcement, (6) Privacy; and (7) Language. This article will shed some light on each difference.

(1) Timeframe

Firstly, one of the main differences between arbitration and litigation is that the latter allows each party to a dispute to appeal any judgment rendered by a local court. The option to appeal a judgment is not only granted to the party that received an unfavorable judgment, but also to the party that received a favourable judgment, in case they are not satisfied with the outcome. Furthermore, the parties to a dispute may appeal more than once throughout the duration of a lawsuit until a final judgment is rendered. On the other hand, once an arbitral award is rendered by the arbitral tribunal chosen by the parties, the parties may not challenge its merits. In other words, they may not challenge the reasoning of the award but may appeal it on procedural grounds (a party may claim that the procedure did not comply with the arbitration center’s rules, which can potentially nullify the award rendered).

Therefore, choosing between arbitration and litigation can be influenced by whether the parties to a written transaction wish to have the option to appeal judgments or not. As arbitration does not allow for appeals based on merits the arbitration process is usually less time-consuming than litigation. Also, local courts are not required to render a final judgment within a limited timeframe. At every stage of litigation, whether it is the court of first instance, court of appeal or court of cassation, lawsuits may be adjourned if judges find themselves burdened by a heavy load of cases to allow them to prioritize their caseload, which contributes to the time-consuming nature of litigation. However, this practice is uncommon in arbitration for two reasons:

Firstly, as aforementioned, each arbitration center must follow its own rules and usually (depending on the arbitration center) the rules impose a certain time frame for the conclusion of an arbitration case. In this regard, both the DIFC-LCIA and DIAC rules stipulate that any arbitration case must be completed within a six-month period. However, the rules permit the arbitrators to extend said period more than once, while limitations apply, if they believe the original six-month period would not give them sufficient time to render their award. In practice, only cases that are highly technical or complex extend beyond the original six-month period.

Secondly, arbitrators are usually not as busy as judges. While judges in the UAE may handle dozens of lawsuits at any given time, arbitrators usually handle far fewer cases.

(2) Influence on the Proceedings

Another distinct difference between arbitration and litigation is that the parties to a dispute have significant influence over arbitration proceedings while they hardly have any influence in a litigation.

First of all, it is possible for the parties in an arbitration case to choose their arbitrator(s). Usually arbitration cases are either handled by a tribunal of one or three arbitrators and the parties to an agreement may decide on this therein. In the event that the parties decide that only one arbitrator should resolve a dispute between them, such an arbitrator is usually chosen and appointed by the arbitration center to assure neutrality, but either party may object on the identity of the appointed arbitrator (depending on the rules of the arbitration center). Further, in the event the parties wish to have three arbitrators resolve a dispute between them, usually each party would choose an arbitrator by its sole discretion and then the two chosen arbitrators would choose the third neutral arbitrator. On the other hand, in a litigation, parties do not have the power to appoint judges. A party in a lawsuit may under certain circumstances, however, demand the change of the judge resolving said lawsuit.

Secondly, the parties to an agreement that chose arbitration as the dispute resolution method may specify in their agreement the time limit for an award to be rendered, and this time limit would be acknowledged by the arbitration center (before adding this term in their agreement, the parties should make sure that the rules of the arbitration center chosen comply with this) while such an option is not granted by law in any litigation.

(3) Costs

Costs vary greatly between arbitration and litigation and therefore this is often a deciding factor when choosing between the two. Costs here include but are not limited to the arbitration tribunal (or litigation) and lawyers’ fees.

Both litigation and arbitration costs are proportional to the value of the claim, but arbitration costs are usually higher than litigation’s. For example, if there is a claim in the value of a little more than AED 1,000,000, litigation costs would be up to AED 40,000 while they can be more than AED 100,000 if the claim goes to one of Dubai’s arbitration centers. Accordingly, choosing arbitration for agreements whose value is moderate can incur significant costs. Therefore, when choosing between arbitration and litigation, it is best to consider the value of the agreement.

Moreover, it is important to note that when a court gives a judgment in a matter, it only awards nominal legal fees regardless of the fees actually incurred. Such fees rarely exceed AED 2,000. This is, however, not the case when it comes to arbitration as it is common for an arbitral tribunal to require the losing party to pay the legal fees incurred by the winning party, which depending on how long and complicated the arbitration was could save significant amounts of money for the winning party.  

(4) The experience of the Arbitrators and Judges

Given the fact that the parties in an arbitration case have a say in choosing their arbitrators, as aforementioned, said parties usually choose arbitrators who are experienced in resolving disputes similar to theirs. On the other hand, not only can the parties to a lawsuit not choose their judges, the litigation system in UAE is not that of specialization. In other words, any judge may find himself resolving any type of disputes whether they are civil, criminal, labour or other matters. Accordingly, parties to a lawsuit are never certain how experienced the judges will be at resolving their dispute, unlike in an arbitration. 

(5) Enforcement

The enforcement of judgments and awards is arguably the most important factor when choosing between arbitration and litigation, as it would make no sense to choose either one if the winning party was unable to benefit from the award or judgment. Therefore, it is important for each party entering into an agreement to consider this issue carefully before taking a decision on their preferred dispute resolution method. This issue is considerably vast, as it not only relates to the chances of enforcing an award or judgment based on the location of each party and the court or arbitration tribunal, but also on the duration of the enforcement process. I will therefore only touch upon a basic outline of this topic for the purposes of this article, and I strongly suggest you seek the advice of a competent UAE lawyer regarding the enforcement of awards and judgments in the UAE to advise you on the best dispute resolution method for the agreement you wish to enter.  

Regarding the enforcement duration, that of an award can take a little over a year longer than that of a judgment. This is because the party ruled against in an award has one additional legal recourse to object and/or delay the enforcement of the award than they would regarding a judgment.

More importantly, considering the location of the party you wish to sign an agreement with, if said party resides or is located within the UAE, then there should not be any significant problems in enforcing a local judgment or a local or foreign award. If you wish to enforce a foreign judgment within the UAE, this is a significantly more complicated legal issue, and could lead to a situation wherein the foreign judgment is not enforced. Again, this topic is of the utmost significance, and I would strongly advise that you seek the advice of a UAE lawyer about it before signing the agreement you wish to enter.

(6) Privacy

With regard to privacy, it would be clearly advantageous to choose arbitration over litigation, as arbitration proceedings are usually conducted entirely in private and all documents pertaining to the arbitration remain confidential. Litigation proceedings, on the other hand, form part of the public record. Accordingly, if keeping a potential dispute private is of significant importance to the parties to an agreement, then it would be best to choose arbitration as the dispute resolution method.

(7) Language

Depending on the rules of the chosen arbitration center, arbitration proceedings can be conducted in any language chosen by the parties to an agreement. In this regard, both the DIFC-LCIA and DIAC permit this. On the other hand, litigation procedures in the UAE must be conducted in Arabic only. Also, any document submitted to the local courts must be in Arabic. If it is not, then it must be translated into Arabic by an approved translation office.

Conclusion

Perhaps after reading all of the above you would think that arbitration is the better dispute resolution method, however, that is not necessarily the case. In general, arbitration may be the better option if the agreement you wish to enter is so technical that you would prefer to have (an) experienced arbitrator(s) resolve it in the case of a dispute. Also, arbitration may be the better option if the value of said agreement justifies paying the significant arbitration costs. On the other hand, if you wish to enter a standard type of agreement (for example, an annual lease agreement), then choosing litigation could be the better option. As mentioned above, enforcement is of tremendous importance. More often than not, choosing between arbitration and litigation comes down to whichever judgment or award would be enforceable in a potential dispute.

I hope you found the above information useful and that it assisted you in learning more about the differences between arbitration and litigation. I believe choosing the dispute resolution method that is best suited to an agreement is of substantial importance and could save you significant trouble later, in the event a dispute arises with another party to the agreement you entered. In any event, it is strongly advisable to seek the advice of a competent UAE lawyer before taking your decision.  

Karim Salem

Karim Salem is a trilingual Senior Corporate Associate, having previously worked for more than 10 years in leading international and local law firms in UAE, Qatar, and Egypt. Karim may be reached by email at k.salem@madadvocates.com or by phone at (+971) 582499260.

Karim is also a member of the ABCD.

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