Area Contract (Gross Cost) / Legal and Regulatory Framework / Gross-Cost Area-Contract / Dispute Resolution

Dispute Resolution
Some of the last provisions to appear in a relatively complex commercial agreement such as a gross-cost area-contract are those providing for the resolution of disputes between the parties. Most commercial disputes are settled by:

Negotiations between the parties.
Litigation before a court-of-law.
Recourse to alternative dispute resolution mechanisms, such as arbitration.

Of all the forms of alternative dispute resolution, arbitration is most often used to settle commercial disputes. Moreover, unlike negotiations between the parties or litigation before a court-of-law, recourse to arbitration needs to be specifically enshrined in the contract. Therefore only arbitration will be discussed here.

Arbitration
Arbitration is a process used by the agreement of the parties to resolve disputes. In arbitration, disputes are resolved, with binding effect, by a person or persons acting in a judicial manner in private (instead of using a national court-of-law, which would normally have jurisdiction if the parties had not agreed to exclude it).

The decision of an arbitration tribunal is usually called an award. Because an arbitration award is binding on the parties, arbitration differs from other alternative dispute resolution mechanisms such as conciliation.

The two main kinds of arbitration proceedings

Ad hoc arbitration — This is arbitration agreed to and arranged by the parties themselves without recourse to an institution. The proceedings are conducted by the arbitrator(s) as per the agreement between the parties or with the concurrence of the parties.
Institutional arbitration — This is arbitration conducted and administered under the rules laid down by an established arbitration organization.

The advantages of arbitration
The attractiveness of arbitration for most corporate litigants, over traditional court proceedings, is due in large measure to the following three factors:

Speed — Court proceedings are usually lengthy. Arbitration is faster than litigation. It can be very quick (weeks or months if the parties so wish). Arbitration awards are not usually subject to appeal and they may be challenged before national courts only on limited grounds.
Cost — Because it’s faster, arbitration is also less expensive than court proceedings. This is despite the fact that parties do not normally pay judges but do bear all the fees and costs of the arbitrators and, in the case of institutional arbitration, the fees of the arbitration institution administering the case as well.
Confidentiality — Court proceedings involve a certain amount of notoriety and may expose the private affairs of the parties to unsought public attention. Arbitration proceedings are private and the awards are kept confidential.

Legal basis for arbitration proceedings
Most countries allow commercial arbitration. Many countries have also enacted arbitration legislation based on the 1985 UNCITRAL Model Law on International Commercial Arbitration. UNCITRAL has adopted a comprehensive set of procedural rules upon which parties may agree for the conduct of arbitration proceedings arising out of their commercial disputes. The UNCITRAL Arbitration Rules are widely used in ad hoc arbitration as well as in institutional arbitration.

It’s important to emphasize however that national arbitration laws, whether or not they follow the UNCITRAL Model Law, are not designed to compel parties to arbitrate, but merely to allow them to do so if they so wish. It’s imperative that the parties agree to arbitration.

While it’s possible for two parties to enter into an arbitration agreement after a dispute has arisen between them, the safest and more traditional approach is to submit to arbitration all or certain disputes that may arise between them in the course of the contract. This is normally done through an arbitration clause in the contract.