What Is Arbitration? How Private Judges Settle Business Disputes

The story in the video

Someone has eaten our lawyer's sandwich, and every piece of evidence points at Gerald the goose. Rather than taking his own goose to court, our lawyer agrees to arbitration: a neutral private judge hears both sides and makes a final decision. Quicker, quieter — and much less embarrassing for Gerald.

How arbitration works

• The parties agree to arbitrate, usually through a clause in their contract signed before any dispute arises.
• They choose one or three neutral arbitrators, directly or through an arbitration institution.
• Each side presents evidence and arguments, often in writing and at a private hearing.
• The arbitrator issues a written decision called an award, which is binding on both parties.
• The award can be enforced through the courts if the losing party doesn't pay.

The arbitration clause: check your contracts

Arbitration only happens if both parties agree to it. In business, that agreement is almost always made in advance, in a clause such as "any dispute arising out of this contract shall be finally resolved by arbitration". A good clause specifies:

• The rules that apply — for example those of an institution such as the ICC, the LCIA or the SIAC, or the UNCITRAL rules
• The seat (the legal home) of the arbitration, which decides which country's courts supervise it
• The number of arbitrators and the language of the proceedings

If your contract has such a clause, a court will usually refuse to hear the dispute and send the parties to arbitration instead.

Arbitration vs court vs mediation

• Court: public, decided by a state judge, with full rights of appeal.
• Arbitration: private and confidential, decided by an arbitrator you help choose, with very limited appeal.
• Mediation: a neutral mediator helps the parties reach their own deal but cannot impose a decision.

Can you appeal an arbitration award?

Usually not on the merits. You can't go to court just because you think the arbitrator got the facts or the law wrong. Courts at the seat can set aside an award only on narrow grounds, such as a serious procedural unfairness, an arbitrator acting outside their powers, or a conflict with public policy. That finality is a large part of what makes arbitration fast.

Enforcing an award around the world

Arbitration's biggest advantage in international trade is enforcement. Under the 1958 New York Convention, more than 170 countries have agreed to recognise and enforce foreign arbitral awards, with only limited grounds for refusal. In many countries, a foreign award is easier to enforce than a foreign court judgment.

Is arbitration right for unpaid invoices?

For large or complex international contracts, arbitration can be ideal. For smaller unpaid invoices, it can be expensive: you pay the arbitrators and often an institution, on top of your lawyers. If the debtor simply isn't paying and has no real defence, a demand letter, a payment order or local court action is often faster and cheaper.

How Collecty can help

Collecty recovers B2B debts in 190 countries. When a contract contains an arbitration clause, our partners advise on the most cost-effective route — negotiation, arbitration or enforcement of an existing award. No win, no fee.