Arbitration vs Litigation: A Practical Comparison of Cost, Time and Enforcement

What is the fundamental difference between arbitration and litigation?

The courts exercise the state’s general jurisdiction: either party can simply file a claim with the competent court. Arbitration, by contrast, exists only where the parties have agreed to refer their dispute to an arbitrator or tribunal instead of a court. That is why the New York Convention requires the arbitration agreement to be in writing, whether it is a clause in the contract or a separate agreement. ^[1]

In the UAE, Federal Law No. 6 of 2018 provides that an arbitration agreement must be in writing or it is void; electronic communications and a clear reference in the contract to a document containing an arbitration clause both qualify. It must be concluded by a person with capacity to act, or by an authorised representative of a legal entity. ^[3]

The practical consequence: the “arbitration vs litigation” decision is usually made when the contract is drafted, not after the dispute arises, because the other party rarely agrees to arbitrate once a dispute has started.

Cost: who pays for what?

In litigation the state pays for judges and courts, and the parties pay court fees and their own lawyers. In arbitration the parties also pay the arbitrators’ fees and the arbitration centre’s administrative charges, which is why it is sometimes more expensive than contracting parties expect.

The 2022 Dubai International Arbitration Centre (DIAC) Rules charge a non-refundable registration fee, followed by an advance on costs calculated on the amount claimed and paid in equal shares by claimant and respondent. In the fee table annexed to the Rules, a dispute of up to AED 200,000 carries an administrative fee of AED 5,000 and tribunal fees of between AED 8,500 and AED 26,000. ^[5] The Saudi Center for Commercial Arbitration (SCCA) charges a SAR 5,000 registration fee, with other fees calculated on the fee schedule in force when the arbitration begins. ^[6]

So do not compare only the up-front fees. Work out the full cost through to enforcement: in court, legal fees may recur at appeal and cassation; in arbitration there is no appeal stage, although an annulment action and enforcement proceedings can still add cost.

Time: is arbitration really faster?

Arbitration’s speed advantage comes from two things: set time limits for the award, and no appeal on the merits.

• Under UAE law: if the parties have not agreed a time limit, the award is due within 6 months of the first hearing, and the tribunal may extend this by up to 6 more months unless the parties agree otherwise. ^[3]
• Under the DIAC Rules: the final award is due within 6 months of the file being transmitted to the tribunal. Expedited proceedings apply automatically where the total of claims and counterclaims does not exceed AED 1 million, in which case the award is due within 3 months, unless the parties agree otherwise in writing. ^[5]
• Under the SCCA Rules: the expedited procedure applies automatically where the amount in dispute does not exceed SAR 4 million, and the sole arbitrator must issue the award within 30 days of the close of proceedings or 180 days of appointment, whichever comes first. ^[6]

After the award there is no appeal. In the UAE the award can be challenged by an annulment action that will not be heard after 30 days from notification, and the court’s decision on it is final, subject only to cassation. ^[3] In Saudi Arabia, Article 49 of the Law of Arbitration excludes any challenge to the award other than an annulment action, which under Article 51 must be filed within 60 days of notification, and under Article 50 the court hears it without examining the facts and merits of the dispute. ^[4]

Speed is not guaranteed, though: challenges to the tribunal, multiple experts and extension requests can drag an arbitration out considerably if the case is not managed firmly.

Enforcement: where is the biggest advantage?

To be enforced in another country, a national court judgment needs a bilateral or regional treaty or reciprocity, depending on that country’s law. An arbitral award, by contrast, falls under the 1958 New York Convention, which obliges each contracting state to recognise and enforce arbitral awards without substantially more onerous conditions than those for domestic awards. ^[1] The Convention has 172 parties, including all six GCC states, which acceded in these years: Kuwait (1978), Bahrain (1988), Saudi Arabia (1994), Oman (1999), Qatar (2002) and the UAE (2006). ^[2]

Their declarations differ: Saudi Arabia, Kuwait and Bahrain apply the Convention to awards made in another contracting state, and Bahrain also limits it to relationships its law treats as commercial. ^[2]

The enforcing court does not review the merits. Enforcement can be refused only on specific grounds proved by the party resisting it, such as an invalid agreement, lack of proper notice or an award beyond the scope of the submission, or where the court finds the subject matter not arbitrable or enforcement contrary to public policy. ^[1] The applicant supplies the original award and arbitration agreement or certified copies, with a certified translation where needed. ^[1]

Domestically, UAE law requires the president of the court to order enforcement within 60 days of the application. ^[3] In Saudi Arabia, an enforcement application is not accepted until the period for an annulment action has expired, and before ordering enforcement the court checks that the award does not conflict with a judgment or decision of a competent Saudi court, committee or commission, does not violate Sharia or public policy, and was properly notified to the losing party. ^[4]

When are the courts the better choice?

• Small claims: where tribunal fees and centre charges would be a large share of the amount claimed.
• A need for appeal rights: some organisations prefer a right of appeal in cases where an error would be costly.
• Non-arbitrable matters: a court may annul an award or refuse enforcement if the subject matter cannot be settled by arbitration. ^{[1, 3]}
• Parties outside the contract: arbitration generally does not bind those who did not sign the agreement, whereas all parties can be joined before a court.

Arbitration, on the other hand, is favoured where there is a foreign party or assets in another country, a need for a technically specialised arbitrator, or a concern for the confidentiality that centre rules provide. ^{[5, 6]}

Hypothetical example: a supply contract with a company whose assets are abroad

A Dubai company signs an AED 800,000 supply contract with a supplier whose assets are in Riyadh, and the contract refers disputes to DIAC arbitration. Because the amount in dispute does not exceed AED 1 million, expedited proceedings apply automatically, so the award is due within 3 months of the file reaching the tribunal unless the parties agree otherwise. ^[5]

Because the contract does not name a seat, the Rules make the DIFC the initial seat, which the tribunal may finally determine once constituted. ^[5] If the award goes in the company’s favour, it can be submitted for enforcement in Saudi Arabia under the New York Convention, as it was made in a contracting state. ^{[1, 2]} Had the parties chosen the Dubai courts instead, enforcing the judgment in Riyadh would need a different treaty basis. The figures are hypothetical and for illustration only.

How do you draft an arbitration clause that will not backfire?

• Name the centre and its rules precisely. Vague wording such as “arbitration in Dubai” with no centre invites a dispute about the dispute.
• State the seat expressly. The seat determines which court supervises the arbitration and which annulment law applies, so do not leave it to default rules.
• Check the signatory’s authority. In the UAE the agreement is void if concluded by someone without authority to represent the entity. ^[3]
• Think about enforcement early. Ask where the counterparty’s assets are, and whether that country is a party to the New York Convention. ^[2]
• Do not delay the arbitration plea. If you are sued in court, raise the arbitration agreement before any defence on the merits. ^[3]

Conclusion

Arbitration is not faster and cheaper in every case, but it delivers a final award enforceable in more than 170 countries. Choose arbitration when foreign enforcement, technical expertise or confidentiality matter, choose the courts for small claims or disputes that need appeal rights, and make that decision when the contract is drafted.