When a commercial dispute arises, going to court is not the only option — and for many Australian businesses, it is not the best one. Arbitration is a private process in which an independent third party, called an arbitrator, hears both sides of the dispute and makes a binding decision. It sits alongside mediation and expert determination as a form of alternative dispute resolution (ADR), and it is increasingly used in commercial contracts across Australia.
This article explains what arbitration is, how it works in practice, where it is governed by law, and how it compares to litigation — so you can make an informed choice about how your contracts should handle disputes.
What arbitration actually is
Arbitration is a consensual process: both parties must have agreed to it, usually through a clause in their contract. That clause — commonly called a dispute resolution clause or an arbitration agreement — specifies that if a dispute arises, the parties will refer it to arbitration rather than take it to court.
Under s 7 of the Commercial Arbitration Act 2010 (NSW) (and equivalent legislation in other states and territories), an arbitration agreement must be in writing, though "in writing" is interpreted broadly — it includes content recorded in electronic communications, exchanges of statements of claim and defence in which the existence of an agreement is alleged and not denied, or any other recorded form. It does not require a formal, signed document.
The arbitrator's decision — called an award — is binding on both parties. It is not simply a recommendation. Once made, an award can generally be enforced through the courts in the same way as a court judgment.
Domestic versus international arbitration
Australian law draws a distinction between domestic commercial arbitrations (those with no international element) and international ones. Domestic arbitrations are governed by the Commercial Arbitration Act in each state and territory — with New South Wales, Victoria, Queensland, South Australia, Western Australia, Tasmania, the ACT, and the Northern Territory each having adopted substantially uniform legislation. International commercial arbitrations, and the recognition of foreign arbitral awards, are governed by the International Arbitration Act 1974 (Cth), which implements Australia's obligations under the New York Convention.
If your business is entering contracts with overseas parties, the international framework is the relevant one — and it is worth building an arbitration clause into the agreement from the start.
How arbitrators are appointed
One of the distinctive features of arbitration is that the parties have significant control over who decides their dispute. Under s 11 of the Commercial Arbitration Act 2010 (NSW), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators. In practice, this often means:
- agreeing on a sole arbitrator by mutual consent;
- each party nominating one arbitrator, with those two appointees then selecting a third (a panel of three); or
- delegating the appointment to an arbitral institution — such as the Australian Centre for International Commercial Arbitration (ACICA) or the Resolution Institute — whose rules govern the process.
Where the agreed procedure breaks down (for example, if a party fails to nominate their arbitrator), either party can apply to a court to make the appointment. The court must have regard to any qualifications the parties required of the arbitrator and to considerations likely to secure an independent and impartial decision-maker.
The ability to choose someone with expertise in your industry — a construction professional for a building dispute, or an accountant for a financial one — is one of arbitration's practical advantages over litigation, where you cannot select the judge.
Confidentiality
Court proceedings in Australia are generally public. Arbitration is not. The Commercial Arbitration Act 2010 (NSW) imposes confidentiality obligations on parties and arbitrators (see ss 27E–27J): neither side may disclose confidential information relating to the arbitral proceedings without the other's consent, unless a specific exception applies (such as disclosure required by law or necessary to enforce or challenge the award).
For businesses where the facts of a dispute — or its very existence — are commercially sensitive, this protection can be significant.
The finality of arbitral awards: a double-edged feature
The most important practical consequence of arbitration is the limited scope for challenge. This cuts both ways.
Setting aside an award
A party who is dissatisfied with an arbitral award may apply to a court to have it set aside, but the grounds are narrow. Under s 34 of the Commercial Arbitration Act 2010 (NSW), a court may set aside an award only if:
- a party to the arbitration agreement lacked legal capacity, or the agreement itself is invalid;
- a party was not given proper notice of the proceedings or was otherwise unable to present its case;
- the award deals with a dispute outside the scope of the arbitration agreement; or
- the award is contrary to public policy or concerns a matter not capable of settlement by arbitration under NSW law.
An application must be made within three months of receiving the award.
Appeals on a question of law
Under s 34A of the Commercial Arbitration Act 2010 (NSW), a party may appeal to a court on a question of law — but only with the court's leave. The bar is very high: the court must be satisfied, among other things, that the determination of the question of law will substantially affect the rights of the parties, and that the arbitral tribunal's decision on that question is either obviously wrong or a matter of general public importance on which the tribunal's decision is at least open to serious doubt. Courts have consistently described this as a stringent threshold, and leave is rarely granted.
The practical effect is that an arbitral award is close to final. If the arbitrator makes an error in legal reasoning that falls short of these grounds, the parties are generally bound by the outcome. That is a feature businesses should weigh carefully before committing to arbitration.
Advantages and disadvantages at a glance
Advantages
- Speed and flexibility. Arbitration is typically faster than litigation. The parties can agree on a timetable and — within limits — on the procedural rules.
- Industry expertise. Parties can select an arbitrator with specialist knowledge of the subject matter.
- Confidentiality. Proceedings and outcomes remain private.
- Finality. The award resolves the dispute without extended appeals, reducing ongoing legal costs once a decision is made.
- International enforceability. Awards made in Australia can be enforced in over 170 countries that have signed the New York Convention.
Disadvantages
- Cost of the arbitrator. Unlike a court judge whose costs are borne by the state, the arbitrator charges fees — often significant ones, particularly for complex or lengthy disputes. Both parties typically share this cost.
- Limited recourse if wrong. Because grounds for appeal are narrow, an erroneous award can be very difficult to correct.
- No procedural shortcuts. Unless the parties agree otherwise, arbitration still involves pleadings, evidence, and submissions — it is not inherently informal.
Practical scenarios where arbitration typically arises
Construction contracts. Major infrastructure and commercial construction contracts routinely include multi-tiered dispute resolution clauses that escalate from negotiation to mediation to arbitration. The ability to appoint an arbitrator with engineering or project-management experience is particularly valued.
Shareholder and joint venture agreements. Disputes between co-owners of a business can be sensitive. Keeping them out of the public courts — and resolved by someone with corporate expertise — is often a priority.
International supply and distribution agreements. Where the counterparty is in another jurisdiction, arbitration is almost always preferable to litigation: enforcing a foreign court judgment internationally is uncertain, whereas a New York Convention award is enforceable in most trading nations.
Common misconceptions
"Arbitration is always cheaper than court." Not necessarily. Arbitration avoids some court costs, but the parties pay the arbitrator directly, and those fees — plus venue and administration costs — can be substantial. For smaller disputes, arbitration may cost more than a tribunal or magistrates court claim. The economics depend heavily on the size and complexity of the dispute.
"We can always go to court if we're unhappy." Once a valid arbitration clause is in a contract, a court will ordinarily stay any court proceedings in favour of arbitration. And as noted above, the grounds for challenging an arbitral award are narrow.
"Arbitration is informal — we don't need lawyers." Arbitration can be less formal than court, but the hearing typically involves legal argument, evidence, and cross-examination. Parties are free to represent themselves, but for anything beyond a minor commercial dispute, legal representation is advisable.
How Artificer Legal can assist
Getting the most out of arbitration — or avoiding its pitfalls — usually requires legal input at two stages: drafting and disputes.
At the drafting stage, a well-drawn arbitration clause does more than just say "disputes go to arbitration." A lawyer will help you specify:
- whether the clause is mandatory or optional;
- the seat of arbitration (the jurisdiction whose law governs the process) and the venue;
- the arbitral rules (institutional or ad hoc) and the number of arbitrators;
- any caps on the arbitrator's fee or procedural timetable;
- whether the parties retain the right to seek urgent injunctive relief from a court; and
- the governing law of the underlying contract.
A vague or incomplete arbitration clause can produce satellite disputes about whether arbitration applies at all — or render the clause unenforceable.
At the dispute stage, a lawyer can advise on whether the clause is valid, help you appoint a suitable arbitrator, prepare your case, and — where there are grounds — assess whether to seek to set aside or appeal an award.
Artificer Legal assists Australian businesses with commercial dispute resolution, including drafting dispute resolution clauses, advising on the arbitration process, and representing parties in arbitral proceedings. Contact us to discuss your situation.
In summary
Arbitration is a private, binding form of dispute resolution that is well-suited to commercial disputes in Australia, particularly where confidentiality, specialist expertise, or international enforceability matters. It is governed by largely uniform state legislation — principally the Commercial Arbitration Act 2010 (NSW) and its equivalents — and by the International Arbitration Act 1974 (Cth) for cross-border matters.
Key points to keep in mind:
- Arbitration arises from a contractual agreement — the drafting of that clause matters.
- Parties can choose their arbitrator; courts provide a fallback if the process breaks down.
- Awards are binding and the grounds for challenge are narrow — finality cuts both ways.
- Confidentiality is a statutory feature, not just a contractual promise.
- Arbitration is not always cheaper than court; the economics depend on the dispute.
- For cross-border contracts, international arbitration and the New York Convention provide a strong enforcement framework.