In the dispute resolution arena, it is cliché to hear that arbitration is more attractive than litigation and some of the reasons often cited for this are that arbitration is faster, more private/confidential, cheaper, more flexible etc. Reality would however reveal that these suppositions are not entirely correct.

Lawyers who engage in the practice of litigation and arbitration would have had a few cases where litigation was faster than arbitration, especially cases commenced by originating summons. On a related note, some litigation cases are conducted with utmost privacy and confidentiality by Judges in Chambers and there are several instances where Judges with the consent of parties abridge time and other procedural requirements under the rules to achieve the flexibility required in given circumstances. While such scenarios are less frequent in litigation compared to arbitration, it is important to remember that arbitration costs can be comparable to, or even exceed, those of litigation, and this can pose some threat to the adoption of arbitration in contracts, especially low-value contracts.

It is basic knowledge that both litigation and arbitration attract costs and parties seeking to engage in either dispute resolution mechanism typically check out the cost implications associated with each one before embarking on the process. In litigation, the common basic costs that parties are exposed to include professional fees for lawyers and filing fees.1 Whereas in a regular domestic or international arbitration, in addition to professional fees for lawyers and filing fees, parties are exposed to additional costs such as administrative fees (where parties use institutions), arbitrator’s fees, secretary/secretarial fees etc. Where a physical hearing is involved, parties may incur other secondary costs such as venue, hotel, feeding, logistics etc. When these expenses are put together, it becomes obvious that arbitration is not particularly cheap, or cheaper when compared with litigation.

While arbitration costs can often be substantial and may even exceed those of litigation, is this enough reason to ditch arbitration in favour of litigation? This question is very crucial because the financial viability or attitude of a potential claimant has a significant influence on his approach or strategy towards dispute resolution. There are a considerable number of cases where potential claimants let go of a claim or grudgingly resort to settlement because of the potential cost of pursuing litigation or arbitration. This is often common with small claims where after computing the costs associated with litigation or arbitration especially, the claimant would potentially be at a loss even if he wins the main claim and damages.
Every day, we are faced with potential claimants whose budgets cannot accommodate the huge costs associated with arbitration. Meanwhile, we continue to be faced with the potentiality of small claims arbitration because the advocacy for arbitration over litigation has been deeply entrenched in the minds of business and commercially minded persons and legal practitioners who easily opt for arbitration as a preferred means of dispute resolution when drafting contracts, regardless of the value of the contract.

A serious challenge is therefore posed whenever: (i) a potential claimant is contractually bound to resolve a dispute by arbitration and for good or bad reasons does not have the budget to pursue an arbitration; or (ii) the claim in dispute is so small that it cannot stand in the face of the cost elements associated with arbitration. The Court system in most jurisdictions somehow envisages and gives special considerations to litigants in this situation by creating a system that entertains small claims with low-cost incentives.

This often involves limiting the cost element to the payment of subsidized filing fees only, thus leaving the litigant to worry only about lawyer’s fees if he or she cannot represent himself or herself. For instance, in Lagos, Nigeria, the Magistrate Court is designed to adjudicate over small claims and all that is required of litigants is the payment of highly subsidized filing fees. This is very much unlike high value claims filed at the High Court with unlimited financial jurisdiction where a percentage of the claims sought by litigants are taxed and collected in advance at filing stage on an ad-valorem basis.

It is notable that considerable efforts have been made by arbitral institutions and practitioners over the years in setting up a framework that would amongst other things make arbitration cost-effective. This effort is very crucial because if structures have been put in place to make litigation cost-effective and financially attractive for litigants and the same measures are not put in place for arbitration, then litigation will unarguably be a preferred option because cost is a driving force when it comes to choice of dispute resolution and strategy.

As the choice of arbitration continues to gain more roots even in relation to low-value contracts, the need to make arbitration more cost-effective becomes even more crucial. Despite efforts made in this direction, a wide gap still exists. An International Arbitration Survey conducted in 2018 by the Queen Mary University of London and White & Case1 revealed that “cost continues to be seen as arbitration’s worst feature.” It is surprising to note that 97% of the respondents of the Survey indicated that international arbitration is their preferred method of dispute resolution, either on a stand-alone basis (48%) or in conjunction with ADR (49%).

Although this sounds like an antithesis because if cost is a driving force for choice of dispute resolution and it is seen as one of arbitration’s worst feature then it is strange that arbitration remains a preferred option. Perhaps the most significant observation to draw from this is that the depth of attraction for arbitration cannot be eroded by the unfavourable cost feature and an unspoken resolution by parties concerned to take their chance with arbitration.

Recently, I had the opportunity of reviewing a draft contract that had an arbitration clause in it and the same draft was also being reviewed simultaneously by other lawyers. During the review, the following conversation ensued about the potential impact that the cost of arbitration may have on the proposed choice of arbitration in the contract (which would qualify as a low-value contract).2 Here are the comments:

Lawyer A:

We strongly advise against Arbitration because it is very expensive. The value of this transaction does not encourage the use of Arbitration. Litigation is advisable in the circumstances.

Lawyer B:
Litigation is slow, tedious without results and more expensive in the long run, not to mention the time spent in unending court appearances and court adjournments which will never be gotten back (and money cannot buy). It is not advisable for a serious minded business person to opt for litigation as their preferred mode of dispute resolution unless the subject matter mandates. The intention is never to get to Arbitration as we intend to keep our relations strive-free and any disputes settled amicably, at worse through mediation and if required then Parties can resolve via arbitration. Courts is a non-starter, not even mentioning the theatre of appeals!!

Lawyer A:
Litigation can be fast if parties are serious, and arbitration can be slow if parties are not serious. Further, arbitration is not immune from appeals and anti-arbitration suits. It is a current headache that practitioners are struggling with because they often end up in the “unholy litigation” after arbitration depending on the attitude of parties. Secondly, you did not address the issue of the cost of arbitration which can conveniently double the entire cost of this transaction. Would cost not matter if arbitration would double the cost of this transaction? Also, nobody wants dispute, thus, your intention not to go past mediation is good but it is not entirely within your control, unfortunately. Remember, mediation only helps parties reach a compromise, not a decision. So, what happens if one party is not pleased after mediation? Will you be ready to pay the price for arbitration?

Lawyer B:
Our preference is Mediation first then arbitration- all decisions are subject to appeal and all processes are subject to parties’ attitudes. We will hedge our bets on arbitration and not litigation.

The conclusion of Lawyer B which was made in 2024 seems to give a possible introspection into the minds of the respondents of the 2018 International Arbitration Survey who expressed their preference for arbitration despite acknowledging the fact that cost posed a challenge. In essence, lawyers and arbitration stakeholders are willing to ignore the cost implications and hedge their bets on arbitration even though it is expensive.

Should the fact that lawyers and stakeholder are willing to hedge their bets on arbitration despite it being expensive give us enough reason to ignore the cost implication of arbitration? Perhaps not. In the following paragraphs, we will discuss practical options that can be considered or adopted in making arbitration cost effective for parties generally and specifically for small claims.

1. Usage of “documents only” arbitration

As stated earlier, the decision to resolve a dispute by arbitration could be a difficult one if the parties involved do not have the budget to settle the cost of arbitration. If a party or parties are faced with this kind of situation and the facts of the case are substantially not in dispute, a “document only” approach may be an attractive way to resolve the cost issue. What this process entails is that parties will only submit to the Tribunal documents that are relevant to the dispute alongside written arguments advancing their respective positions on issues submitted. This requires the mutual agreement of both parties during the preliminary meeting, as they must agree that the proceedings will be conducted on a “documents only basis”. This agreement will then be inserted in their Procedural Order for Directions which will guide the arbitration. Thereafter, parties will exchange their documents and written submissions for consideration and determination by the arbitral Tribunal that will publish the Award. This is akin to an action commenced by Originating Summons in litigation.

2. Effective case management

The scope or number of issues submitted to an arbitral Tribunal for resolution has direct impact on the duration/length of hearings (examination, cross examination, re-examination and oral submissions). In the same vein, the duration or length of hearings have direct impact on the cost of arbitration especially international arbitration. The longer the hearings, the more parties and their lawyers spend on flights, hotels, meals, transcription fees, logistics etc.

Since the duration of hearing has direct impact on cost, parties and Tribunals can reduce the cost exposure in an arbitration if they are able to adopt measures that would limit duration of hearings. This can be achieved through effective case management at commencement, where parties and the Tribunal are able to unbundle the issues sought to be resolved into compartments and reserve only the facts/issues that are controversial or seriously in dispute for hearings while the rest are resolved for resolution either by: (i) settlement; or (ii) written submissions that are focused on the main issues and are based on documentary evidence as against oral evidence. Once the parties and Tribunal are able to narrow down the case management in this manner and incorporate same into their procedural order for directions, it becomes binding, and compliance thereof would ensure reduced hearing duration and effectively cost reduction.

3. Creation of rules for preliminary and summary consideration/disposal of specific claims or issues.

This conversation can be advanced beyond the level where arbitral institutions focus on case management to the level where they create procedural rules that can enhance expedient disposition of certain issues either at the preliminary stages or summarily in the course of the arbitral process. This way, the Tribunal can either at its instance or that of the parties raise, consider and dispose of specific claims or issues that are either unmeritorious or frivolous at the early stage or when they become apparent.1

4. Virtual, hybrid or remote hearings

Similar to case management strategy for cost reduction is the adoption of a virtual or remote hearing technique. Although this suggestion may sound cliche or regular, however, the suggestion here is more of a call to consciousness that the virtual approach is not just about convenience of parties, it can also save more costs than envisaged.

It is true that physical hearing sessions are a lot more engaging, realistic and productive because parties and the Tribunal can have a direct feel of the emotions, demeanour, comportment, mien etc., of the witnesses during hearing. However, it is not in all cases that these factors are necessary. While physical hearings may be advised for a fact-based witness, it may not be necessary for an expert witness whose duty is to lead evidence on a technical subject or subjects. His demeanour or comportment may not be of significant relevance.

With the availability of advanced technological tools for virtual meetings and conferences, players in the arbitration space may aim to normalise virtual hearings and in extreme cases where the emotions, demeanour, comportment, mien etc., of a particular witness or witnesses may be of significant relevance, conduct physical hearing(s) specifically for that purpose.

5. Creation of special process and cost for “small claims arbitration”

Claims that are small naturally or automatically call for cost effective arbitration, otherwise, the entire arbitration process will be futile and counter productive. If the cost of the arbitration process would swallow up the potential claims sought, then what is the essence? While the above suggestions might be helpful generally both for small claims and high-value arbitrations, small claims arbitration might need some additional cost-effective structures to make the choice and adoption of arbitration mode of dispute resolution realistic.

Some arbitral institutions have been generous enough to make provisions that accommodate small claims. For instance, the Lagos Court of Arbitration – International Centre for Arbitration and ADR (LCA) made specific provision under its Rules to accommodate “small claims arbitration.” LCA significantly subsidise the cost of arbitration for small claims not only by keeping the administrative cost low but also by regulating arbitrator’s fee which is one of the major components that make arbitration expensive. Under the Rules, parties are only required to pay highly subsidised filing fees of N25,000, administrative fees of N80,000 and Arbitrator’s fee of between N80,000 and N235,000 plus 2% in excess of N3,000,000. The table below shows details of how the arbitrator’s fees for small claims arbitration is regulated.

The fee schedule shown above is highly subsidised and therefore makes arbitration more attractive and encouraging even for small claims. The provisions for small claims arbitration under the LCA Rules and other similar Rules by other arbitral institutions would therefore appear like a perfect solution to the engagement between Lawyers A and B as shown above.

Perfunctorily or perhaps enthusiastically (depending on the attitude of the small claims arbitrator) the arbitrator would adopt or consider adopting an efficient case management strategy that will ensure speedy and efficient disposal of the arbitration, seeing that his fee is highly subsidised.

It is important to note that the definition of small claims would be determined by each institution, and this can be guided by the commercial strength, positioning and activities of the institution’s base or location. The LCA, which example we have cited, defines small claims as any sum not exceeding N5,000,000 (Five Million Naira) circa $3,500.

Conclusion

Whilst arbitration is unarguably a preferred and more attractive mode of dispute resolution in this era, it is not in any way the cheapest and there is no assurance that it will be so in the foreseeable future if deliberate measures as suggested in this article and more are not adopted. Whilst the efforts to make arbitration cost effective continue to be rolled out, we can continue to relish the respite that admirers of arbitration (who are the vast majority) are willing to hedge their bets on it despite the cost. Whilst bet hedging may sound like a respite, it should not be treated as a license for laxity because the reality may hit differently if the cost of pursuing a claim in arbitration is higher than the claim sought. This in turn may lead to undesired frustration and abandonment of claim may become inevitable thereby defeating the entire essence and purpose of arbitration as a choice of dispute resolution. It is therefore important that all relevant stakeholders make conscious effort to keep arbitration attractive by advancing cost-effective options.

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