Throughout the entire lifecycle of a commercial transaction, the design and selection of a dispute resolution mechanism has become a critical component of a company’s risk management framework. This analysis breaks down the core distinctions between arbitration and litigation from a practical perspective, aiming to provide businesses with actionable guidance for their strategic decisions.
Customised arbitration
Wang Baohua
Senior Partner
W&H Law Firm
Tel: +86 137 0105 8138
Email: wangbaohua2003@163.com
Procedural autonomy.
The principle of party autonomy in arbitration affords significant flexibility in commercial disputes. In private equity disputes, for instance, parties can stipulate that the case be heard by an arbitrator experienced in fund regulation. This procedural adaptability is particularly suited to complex transaction structures.
Confidentiality.
The private nature of arbitration serves to protect a company’s critical commercial assets. This confidentiality extends beyond a simple private hearing. It is enshrined in the explicit duty of secrecy found in institutional rules. Under the China International Economic and Trade Arbitration Commission (CIETAC) rules, for example, arbitrators, administrative staff and the parties themselves are prohibited from disclosing any substantive or procedural information to outsiders, and the final award remains unpublished.
Expert ruling.
Arbitration institutions provide access to specialised arbitrators who can deliver precise rulings in commercial disputes, effectively navigating complex industry-specific technical barriers. In a patent licensing dispute between pharmaceutical companies, for instance, the parties could select an arbitrator with a background in pharmacology. This allows technical issues such as patent infringement comparisons to be clarified directly during hearings without the need for protracted and often costly judicial expert assessments.
Limitations.
The finality of an arbitral award carries an inherent risk of irreversibility in commercial disputes. Should a ruling contain errors in its findings of fact or application of law, companies face significant obstacles in seeking recourse. The cost structure of arbitration also often lacks economies of scale, making it a less cost-effective option for lower-value claims.
For instance, on a contract dispute valued at RMB100,000 (USD14,000), CIETAC arbitration fees might reach RMB10,000, compared to only RMB2,300 for a court case under standard first-instance procedures. An additional prerequisite is the validity of the arbitration agreement itself. An ambiguous clause – such as one stating that “disputes may be submitted to an arbitration institution or a court at party A’s location” – can render the entire agreement invalid.
Standardised litigation
Procedural rigidity.
Litigation follows a strict framework defined by codes such as the Civil Procedure Law, with each stage – from case filing and evidence submission to hearings, judgments, appeals and retrials – governed by explicit procedural rules. This structured process is designed to safeguard the procedural rights of the parties to the greatest extent and ensure standardised dispute resolution.
Appellate recourse.
The litigation system’s “two-instance finality” provides a crucial buffer for error correction in commercial disputes, reducing the risk of miscarriages of justice impacting business decisions. A party dissatisfied with a first-instance judgment may appeal within the statutory time limit. If a legally effective judgment is believed to be flawed, applications for a retrial or prosecutorial supervision remain available.
In contrast, arbitration’s single and final award lacks this layered safeguard. Should an award contain errors, a company’s recourse is limited to applying to set it aside or to refuse enforcement measures with a documented success rate of less than 10%.
Limitations.
With the exception of specific legally defined circumstances, court hearings and judgments in commercial cases are generally made public, a practice that can pose a commercial risk. Furthermore, while judges possess legal expertise, they cannot be expected to have specialist knowledge across all commercial fields.
Therefore, technical disputes often rely on opinions from judicial appraisal institutions, indicating a potential mismatch with highly specialised subject matter. A further significant constraint lies in cross-border enforcement, which, for court judgments, is contingent upon bilateral treaties. In the absence of such treaties, enforcement becomes exceptionally difficult.
Strategies
Step 1: Analysing specific scenarios to define the core characteristics of the dispute.
For cross-border commercial disputes where the counterparty’s assets are located in a member state of the New York Convention, arbitration should be prioritised. If assets are solely domestic, the choice may hinge on confidentiality needs. For disputes involving trade secrets, such as core technology, customer data and transaction pricing, arbitration is preferable to mitigate disclosure risks.
In knowledge-intensive fields such as construction, intellectual property and financial derivatives, arbitration is again recommended, as it allows for the appointment of specialised arbitrators to enhance decision quality. For low-value, high-frequency disputes arising from routine procurement or service contracts, litigation is often more suitable, leveraging its lower costs and procedural efficiency.
Step 2: Devising clauses to mitigate risks at the initiation of proceedings.
When drafting an arbitration agreement, essential elements such as the arbitral institution, scope of matters for arbitration, and the seat of arbitration must be clearly defined. For a jurisdiction clause in litigation, it is advisable to designate a court that is relatively favourable to one’s own position, such as the court in the place of one’s own domicile, the place of contract performance, or the project location.
Step 3: Engaging external legal support.
The complexity of commercial dispute resolution necessitates the early involvement of legal counsel in the decision-making process. During the drafting phase, lawyers can help avoid pitfalls such as invalid arbitration agreements. Once a dispute arises, they can formulate a strategy by leveraging procedural tools – for instance, in litigation, applying for asset preservation to secure a tactical advantage.
Takeaways
There is no absolute superiority or inferiority between arbitration and litigation, only a question of suitability to the circumstances. When selecting a dispute resolution mechanism, companies must move beyond an “either/or” mindset. The decision should be based on a comprehensive assessment of core needs – such as efficiency, cost control, confidentiality and expertise – tailored to the specific type of dispute and business context.
It is advisable to integrate dispute resolution planning into the broader compliance management system. With professional legal support, companies can achieve full-cycle risk management – “preventive measures beforehand, efficiency during proceedings, and enforceable outcomes thereafter” – safeguarding the security of commercial transactions.
Wang Baohua is a senior partner at W&H Law Firm. He can be contacted by phone at +86 137 0105 8138 and by email at wangbaohua2003@163.com
