Arbitration practitioners often view arbitration as the hero of dispute resolution. Is there a gap between lawyers' love for arbitration and the pragmatic concerns to dispute resolution from the business side? In this SCC Spotlight Talk, we discuss with Knut Høivik what it takes to make arbitration the hero of dispute resolution.

Knut Høivik is Associate Professor at the Faculty of Law, University of Bergen, where his research focuses on energy law, including energy contracts and license systems. Prior to joining the faculty, he served as Vice President in the Legal Department of Equinor ASA and was a partner at the law firm Schjødt.

Knut, is arbitration the hero of commercial dispute resolution?

It depends. Let me explain.

Arbitration is often the law firms’ playground. Disputes, however, are normally the business’s headache. As dispute resolution lawyers, we love arbitration: the game, the competition, the strategies, the war stories. The business doesn’t necessarily share this romance. The businesses want disputes solved quickly, effectively, with minimum effort. Resolving any dispute can be lengthy, costly, and drains energy from productive activities, arbitration is no exception. The law firms’ enthusiasm may cause us to underestimate the business headache.

From a business perspective, the likelihood of success is only one factor in the equation. In significant disputes, the resolution process can shape the future of the business. Parties must balance important strategic considerations, including the consequences for business relations with the counterparty, reputational impact of the dispute, alignment with internal strategy and priorities, and alignment with company values.

The business will typically consider arbitration the hero in three situations. First, in a limited “we agree to disagree” scenario where parties cannot find an amicable resolution. Second, a recurring issue where no clear precedent exists and parties need one clear path for the future. Third, an aggressive counterparty takes an extreme position, leaving no choice but to go to arbitration.

One concern in relation to arbitration is the lack of legal precedents that are created. What are the business’ perspective on this?

Although parties may value confidentiality in their own disputes, they often benefit from being able to observe how similar legal issues are resolved in other cases. If an entire industry agrees that disputes should be resolved publicly, this can greatly enrich the available body of legal precedents. This was an important consideration, among several others, when the Norwegian oil and gas industry decided to amend the dispute resolution clause in the joint operating agreement for licences on the Norwegian Continental Shelf, shifting from arbitration to court proceedings. However, commercial parties typically prefer to resolve their disputes through arbitration. Although arbitral awards do not carry legal precedent, they can still have significant influence in the legal community if the quality is outstanding. Therefore, well-reasoned arbitration awards on important contractual principles should be published where possible. Many arbitration institutes, such as the SCC, provide for the publication of anonymised awards if the parties do not object. I am currently involved in a project launched by the Norwegian Arbitration Association to provide for the publication of anonymised Norwegian ad hoc arbitral awards. I encourage parties not to reject this opportunity. 

In that way, arbitration can indeed be the hero of commercial dispute resolution.

There is a notable example from the Norwegian Supreme Court illustrating the importance of making arbitral awards public. The dispute concerned the interpretation of the variation order system in a standard construction contract. One question was whether a maximum limit of 15% of the original contract price for variation orders also applied to an agreed option under the contract. Just six months earlier, an arbitral award in Norway had addressed the exact same question. The parties agreed that the award could be disclosed, and the Norwegian Supreme Court reached the same conclusion as the arbitral tribunal, even quoting paragraphs from the award. This demonstrates that arbitration can be the real hero when precedents are needed.

What is the most important factor for ensuring a successful arbitration?

Applying inverse thinking, one might ask: what would guarantee failure in an arbitration? The answer often comes down to Pierre Lalive’s observation: “Arbitration is only as good as its arbitrators.”

From a business perspective, the selection of arbitrators is arguably the most crucial decision, as it determines cost control, effective progress, due process, and the quality of the award. This consideration may be more significant than the choice between institutions or procedural rules.

In Norway, there is a tradition for parties to jointly appoint the members of the tribunal. This has become a way to ensure shared control over tribunal composition. It also fosters collaboration between the parties, encouraging them to focus on overall tribunal quality, competence, experience, availability, and diversity, whilst reducing unproductive tension.

To conclude, what would you say makes arbitration the hero of commercial dispute resolution from a business perspective?

Arbitration is in many ways the most suitable method for resolving commercial disputes. However, parties’ representatives must appreciate the challenges that disputes can create for the business, and should endeavour to support the in-house legal team in managing the dispute effectively.