Before You Litigate: Choosing Between Arbitration and the Courts

When a commercial relationship breaks down, one of the first questions is where the dispute will be decided. The answer is usually already written into the contract. If it is not, or if the clause is unclear, the parties may spend time and money arguing about the forum before they can argue about the merits.

This note sets out the main considerations, first for those drafting a contract, and then for those who already have a dispute.

The case for arbitration

Arbitration is a private process in which the parties’ dispute is decided by one or more arbitrators rather than by a judge. Its advantages are well known. Proceedings are generally confidential, which matters to businesses that would rather not air a dispute in public. The parties can choose decision-makers with relevant expertise — an engineer in a construction dispute, for example, or a lawyer experienced in a particular industry.

Most importantly for cross-border contracts, arbitral awards can be enforced in the many countries that are party to the New York Convention, now more than 170. A court judgment, by contrast, may be difficult to enforce in a country with which there is no reciprocal arrangement. Kuala Lumpur has an established arbitration centre and a supportive legal framework, which makes it a practical choice of seat for regional contracts.

Arbitral awards are also, in general, final. The grounds on which an award can be challenged are limited. For parties who value certainty, this is an advantage; for a party that loses, it can be a disappointment.

The case for the courts

For domestic disputes, the Malaysian courts are efficient and their procedures are well understood. Court proceedings allow a party with a clear claim to apply for summary judgment without a full trial. The parties do not pay the judge, whereas in arbitration the tribunal’s fees and the costs of the institution can be substantial.

Courts can also bring in third parties more easily. Arbitration rests on agreement, so a related party who did not sign the arbitration clause may not be bound by it. In disputes involving several contracts and several parties, a single court action can be simpler than parallel arbitrations. And a right of appeal, which arbitration largely excludes, is sometimes worth having.

Tiered clauses: useful, if precise

Many contracts provide for a sequence: negotiation between senior executives, then mediation, and only then arbitration or litigation. Such clauses can preserve relationships and encourage early settlement. They can also create a new argument — whether the earlier steps were properly completed before proceedings began.

If a tiered clause is used, each step should be clearly defined: who must meet, within what period, what happens if one side does not engage, and when a party is free to move to the next stage. Vague obligations to “use best efforts to resolve the dispute amicably” are better than nothing, but not by much.

When the dispute has already arisen

If a dispute has arisen, start with the clause. Read it carefully, including any notice requirements and preliminary steps. Check the limitation period: claims that are not brought in time may be lost regardless of their merits. Preserve documents, including emails and messages on personal devices, and be careful about what is put in writing from now on.

Remember that an arbitration agreement does not leave a party without access to urgent help. The courts can, in appropriate cases, grant interim measures in support of arbitration — for example, to preserve assets or evidence while the tribunal is constituted.

Finally, consider whether the dispute needs to be decided at all. Many commercial disputes are resolved by negotiation or mediation once each side has a clear view of its position. A forum chosen with care, and a case prepared with discipline, make that outcome more likely, not less.