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Why Consider Arbitration Over Litigation for Resolving Domestic & International Supply-Chain Disputes

September 7, 2021

By: Cristina Rodriguez

Between the global COVID-19 pandemic, the Suez Canal gridlock, solar winds cybersecurity attacks, and cyber breaches, supply chains have been repeatedly battered by disruptive events in recent months. Many companies face ongoing supply-chain disruptions resulting from labor shortages combined with increased demand from consumers. These disruptions not only impact a company’s inventory and profits, but they also damage reputation, goodwill, and create fertile ground for legal disputes that only exacerbate the damage. Not surprisingly, many international arbitration institutions have reported record highs in the number of new cases filed in the past year. 

Years of supply chain management research advises that resilience is the key to surviving supply chain disruptions. To be resilient, a company must be forward-looking, adaptive, and prepared to promptly respond to unforeseen events. Technology, redundancies, and planned contingencies are important tools. A robust and flexible conflict resolution process that takes advantage of all available dispute resolution devices, including mediation and arbitration, is also integral to safeguarding supply chains.

Conflict resolution is not something that can be relegated to a single, boilerplate arbitration or choice of law provision in a contract. With communication at its core, a functioning framework provides multiple opportunities to identify conflict, respond, and collaborate at every level.

There is a broad spectrum of dispute resolution options for companies to choose from, including: negotiation, use of ombudsman, mediation, conciliation, mediation-arbitration, dispute resolution advisors, dispute review boards, neutral evaluation, expert determination, arbitration, and more. These techniques involve the use of a skilled, neutral third-party and can result in timely, economic, and effective outcomes and improved business relationships, compared to traditional litigation.

When all collaborative efforts fail to yield a resolution, arbitration is the preferred end point.  Arbitration provisions empower parties to avoid the time, cost, and uncertainty associated with litigation in court—the most time-consuming and cost-prohibitive resolution option. Arbitration presents numerous benefits over litigation for resolving supply-chain disputes. For example:

  1. Parties can select the location for the arbitration and what law and procedures will govern. In international contracts, it is paramount to insulate parties from the uncertainty of litigating in a foreign court, under foreign laws.  
  2. Parties can choose who will determine the outcome of their dispute—panel members with a specified skill set or background over a jury or judge who may not appreciate or understand their industry and business interests. 
  3. Parties can embrace greater flexibility in lieu of rigid judicial procedures. They can limit permitted discovery and relax evidentiary requirements, which vary wildly across global jurisdictions. Parties can also set tighter timeframes that are not beholden to judicial norms.
  4. Since arbitrations are confidential, parties can preserve the privacy of their dispute, details of their business transactions, and operations rather than having them become part of a public record. 
  5. Since most countries have joined the New York Convention, an arbitral award is readily enforceable in almost any country and without years of extensive appeals.

Arbitration clauses are not one-size-fits-all. While standard clauses are a great starting point, personalized clauses require attention to the specific circumstances and interests of the parties, the business relationship, and the transaction(s). Careful attention to the drafting of arbitration clauses in contracts is an important factor in tailoring the process to meet each business’ unique needs. 

Legal disputes are time consuming and add to the cost of any transaction. A well-planned, multi-faceted dispute resolution framework that is tailored to each party’s business needs, expedites resolutions, reduces costs, and increases a company’s resilience to supply-chain disruptions.