What Is the Difference Between Arbitration and Litigation in International Commercial Contracts? Practical Considerations for Businesses Selecting a Dispute-Resolution Method

In international commercial contracts, dispute-resolution clauses are often placed at the end of the contract, but they may determine whether a business can effectively recover debts, control costs, and maintain leverage in negotiations when a dispute arises. When engaging in cross-border transactions, agency or distribution arrangements, technology licensing, OEM/ODM cooperation, software services, or supply-chain cooperation, businesses frequently face one question: if a dispute arises in the future, should they choose court litigation or agree to arbitration?

Both arbitration and litigation can resolve commercial disputes, but they differ in their legal foundations, procedural designs, methods of adjudication, confidentiality, available remedies, and methods of cross-border enforcement. If businesses do not clearly design their dispute-resolution clauses before signing, they may subsequently encounter overlapping proceedings, jurisdictional disputes, enforcement difficulties, or uncontrolled costs.

Legal Basis of Arbitration: A Written Arbitration Agreement Is Required

Under Taiwan's current Arbitration Act, parties may enter into an arbitration agreement concerning an existing or future dispute and agree that the dispute will be arbitrated by a tribunal consisting of one arbitrator or an odd number of arbitrators. Disputes that may be submitted to arbitration are generally limited to those that may legally be resolved through settlement, and the arbitration agreement must be made in writing.

This means that if businesses want future disputes to be resolved through arbitration, they cannot unilaterally demand arbitration only after a dispute arises. An arbitration clause should be clearly incorporated into the contract in advance, or the written documents, correspondence, telegrams, electronic communications, or other communications exchanged between the parties must be sufficient to establish that they agreed to arbitration.

Principal Differences Between Arbitration and Litigation

For businesses, the differences between arbitration and litigation concern more than merely "where the dispute is resolved." They also include the decision-maker, public accessibility of the proceedings, available remedies, enforcement methods, and the difficulty of cross-border enforcement. The following summarizes common differences:

Item	Arbitration	Court Litigation
Source of procedure	Based on a written arbitration agreement between the parties.	An action is filed before a court with jurisdiction in accordance with the law.
Decision-maker	Arbitrators are selected by agreement of the parties or under the arbitration rules, with consideration given to legal, industry, or technical expertise.	The case is heard by a judge under civil litigation procedures.
Public accessibility of proceedings	Proceedings are generally more private and confidential, but this must still be confirmed according to the arbitration rules, confidentiality agreements, and circumstances of the case.	Court proceedings are generally more public, and judgments may also be published in judicial databases.
Available remedies	An arbitral award generally cannot be appealed through a rehearing of the merits, but an action to set aside the award may be filed if grounds under the Arbitration Act exist.	Appeals, interlocutory appeals, and other remedies are generally available under the Code of Civil Procedure.
Method of enforcement	An arbitral award has the same effect between the parties as a final and binding court judgment, but compulsory enforcement generally requires an application for a court enforcement order.	A final and binding judgment may serve as an enforceable title for an application for compulsory enforcement.
Key considerations in cross-border cases	Consider the seat of arbitration, arbitral institution, arbitration rules, governing law, language, and recognition and enforcement of foreign arbitral awards.	Consider court jurisdiction, international service, recognition and enforcement of foreign judgments, translation, and authentication.

Can a Party File Directly with a Court When an Arbitration Clause Exists?

One effect of an arbitration clause is to prevent a party from bypassing the agreed arbitration procedure and filing a court action directly. Under the Arbitration Act, if one party disregards an arbitration agreement and initiates litigation, the court must, upon application by the other party, order the proceedings stayed and require the plaintiff to submit the dispute to arbitration within a specified period. However, if the defendant has already presented oral arguments on the merits, this may affect the timing of the procedural defense.

If a business receives a court complaint while the contract already contains an arbitration clause, it should promptly determine whether to raise the arbitration agreement as a procedural defense. Failure to assert it in a timely manner may result in a dispute originally intended for arbitration proceeding through court litigation.

Do Not Merely State That a Dispute "May Be Resolved Through Arbitration or Litigation"

Contracts commonly include wording such as: "Disputes arising from this Agreement may be resolved through arbitration or litigation." Although such a clause appears to preserve flexibility, it may instead create conflicts over the choice of procedure after a dispute arises.

Supreme Court Civil Judgment No. 1491, Tai-Shang, 2007, stated that an agreement allowing disputes to be resolved through arbitration or litigation grants the parties a procedural right of choice. Once one party exercises that right and the selected proceeding becomes pending, the other party is bound by that choice. If the parties separately commence arbitration and litigation proceedings, priority is determined according to which proceeding became pending first.

This judicial view reminds businesses that an ambiguous provision stating that "either arbitration or litigation may be used" may result in both parties racing to select a procedure, creating procedural disputes and increased costs. If a business intends arbitration to be the principal dispute-resolution method, the clause should clearly state that disputes "shall be submitted to arbitration." If court litigation is preferred, the court with jurisdiction and applicable governing law should also be clearly specified.

Arbitral Awards Are Not Entirely Immune from Challenge, but the Scope of Court Review Is Limited

Although an arbitral award has the same effect between the parties as a final and binding court judgment, this does not mean that arbitration proceedings are entirely free from judicial supervision. Under the Arbitration Act, a party may bring an action to set aside an arbitral award when specified grounds exist, such as the arbitration agreement not existing or being invalid, the arbitral tribunal failing to allow a party to present its case, the composition of the tribunal or the arbitration procedure violating the arbitration agreement or legal requirements, or other material defects specified by law.

Businesses should note, however, that an action to set aside an arbitral award does not allow a court to rehear the entire commercial dispute and generally cannot succeed merely because a party is "dissatisfied with the arbitration result." The review focuses on the arbitration agreement, procedural due process, composition of the arbitral tribunal, scope of the award, and material statutory defects.

Foreign Arbitral Awards Still Require Court Recognition Before Enforcement in Taiwan

International commercial contracts frequently provide for disputes to be handled by a foreign arbitral institution or at a foreign seat of arbitration. Under the Arbitration Act, an arbitral award is considered a foreign arbitral award if it is rendered outside the territory of the Republic of China or rendered within the territory of the Republic of China under foreign law.

A foreign arbitral award does not automatically have compulsory enforceability in Taiwan. It must first be recognized by a court upon application. Only after recognition does it have the same effect between the parties as a final and binding court judgment and may serve as an enforceable title. An application for recognition must include the arbitral award, arbitration agreement, applicable arbitration rules, and other relevant documents. Chinese translations must also be submitted if the documents are in a foreign language.

Supreme Court Civil Judgment No. 1563, Tai-Shang, 2021, also stated that a foreign arbitral award does not directly receive the same effect as a domestic arbitral award. It may be submitted to the competent court for compulsory enforcement only after a Taiwanese court has reviewed the award, determined that the applicable requirements are satisfied, and issued an order recognizing it. A foreign arbitral award is not subject to an action to set aside an arbitral award under Article 40 of the Arbitration Act.

When Is an Arbitration Clause More Appropriate?

Arbitration is not necessarily superior to litigation in every case. Businesses should make their determination according to the transaction value, counterparty, dispute type, confidentiality needs, professional expertise required, place of enforcement, and anticipated costs. The following circumstances are generally more suitable for considering an arbitration clause:

• The transaction is cross-border: The parties are located in different countries or regions, and recognition and enforcement abroad may be required in the future.
• The dispute involves specialized technology or industry knowledge: Examples include engineering, semiconductors, software licensing, technology transfer, equipment acceptance, or international supply-chain disputes.
• The business emphasizes confidentiality: For example, the business may not want royalties, trade secrets, technical documents, customer information, or business models to become public.
• The parties wish to avoid parallel litigation in multiple countries: If the parties may file actions against one another in different countries, an arbitration clause can centralize the dispute-resolution procedure.
• The parties are willing to design the procedural rules in advance: These include the seat of arbitration, arbitral institution, number of arbitrators, language, governing law, and method of presenting evidence.

When Is Court Litigation More Appropriate?

If the transaction or dispute is primarily centered in Taiwan, the assets of the opposing party are also located in Taiwan, and the business wishes to obtain a judgment, provisional measure, or enforcement through court procedures, court litigation may remain the more direct option.

• The principal assets of the opposing party are in Taiwan: Subsequent compulsory enforcement is more likely to be handled directly through Taiwanese courts.
• The amount in dispute is not high: If arbitration costs are relatively high, court litigation may be more cost-effective.
• Court-ordered provisional or compulsory procedures are required: Examples include provisional attachment, provisional injunctions, preservation of evidence, or compulsory enforcement.
• The business wishes to retain appellate remedies: Court litigation generally provides a more complete appeal system.
• The dispute is unsuitable for arbitration: Arbitration should not be agreed upon if the dispute cannot legally be resolved through settlement or involves specific public-law, status-related, administrative, or other non-arbitrable matters.

How Should Businesses Design Dispute-Resolution Clauses When Signing Contracts?

A dispute-resolution clause in an international commercial contract should not merely state that "the parties shall resolve disputes through negotiation, and if negotiation fails, the matter may be handled in accordance with the law." Such wording is overly general and cannot effectively reduce procedural uncertainty when a dispute arises.

If arbitration is selected, the clause should at least clearly specify the arbitral institution, arbitration rules, seat of arbitration, number of arbitrators, language of arbitration, and governing law. If court litigation is selected, the clause should clearly specify the court with jurisdiction, governing law, method of service, and language of documents. A cross-border contract should also assess the location of the principal assets of the opposing party because successful recognition and enforcement of a future judgment or arbitral award is often more important than prevailing in the dispute itself.

Businesses should also avoid including conflicting dispute-resolution provisions in the same contract. For example, the Chinese version may provide for jurisdiction before a Taiwanese court while the English version provides for foreign arbitration, or an earlier provision may require arbitration while a later provision allows either party to initiate court proceedings. If multilingual versions are inconsistent, the contract should specify which language version prevails to avoid becoming involved in a dispute over contractual interpretation before addressing the underlying dispute.

Cross-Border Legal Practice Recommendations

AIPT Group recommends that businesses treat the dispute-resolution clause as a core element of risk management before signing an international commercial contract rather than as routine wording at the end of the contract. The advantages and disadvantages of arbitration and litigation should be assessed before signing, particularly for transactions involving substantial payments, technology licensing, patent or trademark licensing, OEM/ODM cooperation, multinational agency or distribution arrangements, or long-term supply-chain cooperation.

• Avoid ambiguous clauses: Do not merely state that a dispute "may be resolved through arbitration or litigation." Clearly designate the primary dispute-resolution method.
• First confirm the place of enforcement: If the principal assets of the opposing party are located abroad, assess whether an arbitral award or court judgment can be recognized and enforced there.
• The arbitration clause should be complete: Specify the arbitral institution, seat of arbitration, number of arbitrators, language of arbitration, arbitration rules, and governing law.
• The litigation clause should be clear: If court litigation is selected, specify the court with jurisdiction, method of service, governing law, and language of documents.
• Preserve flexibility for provisional measures: Even if arbitration is agreed upon, assess whether the contract should preserve the possibility of applying for provisional attachment, provisional injunctions, or other provisional measures.
• Major contracts should be reviewed in advance: Before signing a cross-border contract, legal, intellectual property, financial, and business teams should jointly review the transaction risks and dispute-resolution costs.

Conclusion

Neither arbitration nor litigation is absolutely superior. The appropriate choice depends on the business transaction model, allocation of risks, and enforcement needs. Arbitration is suitable for commercial disputes emphasizing cross-border enforcement, confidentiality, professional expertise, and procedural flexibility. Litigation is suitable for cases requiring court procedures, provisional measures, appellate remedies, or involving principal assets located in Taiwan.

For businesses, the most important step is to clearly draft the dispute-resolution clause before signing rather than discussing whether to use arbitration or litigation only after a dispute arises. The clearer the clause, the fewer procedural disputes are likely to occur, and the greater the ability of the business to maintain control over the resolution of cross-border disputes.

Sources: National Laws and Regulations Database｜Arbitration Act
Chinese Arbitration Association, Taipei｜Potential Conflicts and Considerations Regarding Arbitration Clauses
Supreme Court Civil Judgment No. 1563, Tai-Shang, 2021｜Foreign Arbitral Awards and Actions to Set Aside Arbitral Awards