01. litigation

The question

However carefully a commercial relationship is structured, disputes arise, and when they cannot be resolved by agreement, the parties need a means of having them decided. This module examines the means by which commercial disputes are resolved, and it begins with the oldest and most fundamental, litigation, the resolution of a dispute by the courts of the state. The question is what litigation is, how a commercial action proceeds in outline, and what advantages and limitations litigation has as a means of resolving a commercial dispute, particularly one that crosses borders. The answer draws on the account of courts and adjudication in Course 1 and sets the baseline against which the alternatives examined in the following sub-units, arbitration and mediation, are to be judged.

What litigation is

Litigation is the resolution of a dispute by the courts of the state, the process by which a party brings a claim before a court, the court hears the parties and determines the matter according to law, and the court gives a binding decision that the state's authority stands behind. Litigation is the paradigm of dispute resolution, the means the state provides for the authoritative determination of legal disputes, and it is, in the terms of Course 1, the central work of the courts as the institutions of adjudication.

Litigation connects to the account of the courts and of adjudication in Course 1 and to the function of law in resolving disputes. The court is an organ of the state, exercising the state's judicial authority; it determines the dispute by applying the law to the facts it finds, according to a defined procedure that gives each party the opportunity to present its case and to answer the other's; and its decision is backed by the coercive authority of the state, which will enforce the judgment if necessary. Litigation is, in this respect, distinguished from the alternatives examined later in this module by its public and official character: it is conducted by an organ of the state, according to the state's procedure, and produces a decision that the state's authority enforces, whereas arbitration and mediation rest on the parties' agreement and engage the state's authority only in defined and more limited ways. The reader who understood the courts and adjudication in Course 1 understands the foundation of litigation as the state's provision for the authoritative resolution of disputes.

Consider a commercial party with a claim against another that the parties cannot resolve by agreement. The claimant brings the claim before a court of the state, which hears both parties according to its procedure, determines the matter by applying the law to the facts, and gives a binding decision that the state will enforce. The dispute is thereby resolved by the authority of the state, through its courts. The example shows litigation as the resolution of a dispute by the courts of the state, backed by the state's authority.

Litigation is therefore the resolution of a dispute by the courts of the state, the paradigm of dispute resolution, in which an organ of the state determines the matter according to law and a defined procedure and gives a binding decision backed by the state's coercive authority, distinguished from the alternatives by its public and official character.

The course of a commercial action

A commercial action proceeds through a defined sequence, and an outline of that sequence, which is broadly comparable across the systems despite differences of detail, clarifies what litigation involves. The action is commenced by the claimant's bringing its claim before the court and notifying the defendant, who is given the opportunity to respond; the parties define the matters in dispute through their written statements of their respective cases; the parties then disclose and exchange the evidence relevant to the dispute, including documents and the evidence of witnesses, according to the procedure of the system; and the dispute is determined at a hearing or trial at which the parties present their cases and their evidence and the court reaches its decision.

This sequence connects to the requirements of a fair procedure that the rule of law, examined in Course 1, demands of adjudication. The procedure is designed to ensure that each party has notice of the case against it and a fair opportunity to present its own case and to answer the other's, and that the court decides on the basis of the evidence and the law, impartially and according to a defined process; these procedural protections are essential to the legitimacy of the decision and connect litigation to the procedural dimension of the rule of law. The action concludes in a judgment, the court's binding determination of the dispute, which declares the parties' rights and obligations and, where appropriate, orders a remedy, such as the payment of damages or the performance of an obligation, drawing on the remedies examined in the contract module. The judgment is ordinarily subject to appeal to a higher court, which may review it for error, so that the system provides for the correction of mistakes, and once final the judgment may be enforced by the state's machinery against the losing party. The course of the action, from commencement through the definition of issues, the exchange of evidence, and the trial, to judgment and possible appeal, is the process through which the court arrives at and gives effect to its determination.

Imagine a commercial dispute litigated to its conclusion. The claimant commences the action and the defendant responds; the parties define the issues and exchange the relevant documents and witness evidence; the matter is tried, each party presenting its case; and the court gives judgment, determining the dispute and ordering a remedy. The losing party may appeal, and, the judgment being final, it may be enforced. The example shows the course of a commercial action from commencement to judgment, enforcement, and possible appeal.

The course of a commercial action therefore proceeds through commencement, the definition of the issues, the exchange of evidence, and the trial, to a judgment that determines the dispute and may be appealed and enforced, a sequence governed by a procedure designed to secure a fair hearing and an impartial decision according to law, in keeping with the procedural requirements of the rule of law.

The advantages of litigation

Litigation has substantial advantages as a means of resolving commercial disputes, and stating them connects this sub-unit to the comparison with the alternatives that the module invites. The advantages flow from the public and official character of litigation and from the authority of the state that stands behind it. Litigation is conducted by courts that are an established and authoritative arm of the state, staffed by independent judges, applying the law according to a tested procedure, and the decisions of the courts are backed directly by the coercive authority of the state, which will enforce a judgment within its territory without the further step that enforcement of an arbitral award requires there.

These advantages connect to the values of authority, impartiality, and the development of the law. The court's decision carries the authority of the state and is enforceable by the state's machinery within its territory; the court's procedures and its independence provide strong guarantees of a fair and impartial determination; the availability of appeal provides for the correction of error; and litigation, being public, contributes to the development of the law, for the reasoned decisions of the courts, examined in Course 1 as a source of law in the common law tradition and as guidance in others, build the body of precedent and interpretation by which the law grows and becomes predictable. Litigation also has the advantage, in a multi-party dispute, of being able to bind all the relevant parties before the court, which the consensual alternatives, resting on agreement, may find more difficult. For a domestic commercial dispute, litigation in the parties' own country offers an authoritative, enforceable, and developed means of resolution, and it remains the default to which parties resort where they have not agreed otherwise.

Consider a domestic commercial dispute between parties in the same country. Litigation offers them an authoritative court, an independent judge, a tested and fair procedure, a decision enforceable by the state without further formality, the possibility of appeal to correct error, and a reasoned judgment that contributes to the law. For such a dispute, litigation provides a strong and complete means of resolution. The example shows the advantages of litigation in the domestic commercial setting.

The advantages of litigation are therefore its authority, its enforceability by the state within its territory, its strong guarantees of a fair and impartial procedure, the correction of error through appeal, and its contribution to the development of the law, advantages that flow from the public and official character of litigation and that make it a strong means of resolving commercial disputes, particularly domestic ones.

The limitations of litigation

Litigation has limitations, however, particularly for the international commercial dispute, and these limitations are the reason parties so often turn to the alternatives examined in the following sub-units. The limitations connect this sub-unit to the cross-border problems examined in the previous module and to the appeal of arbitration that the next sub-unit develops. Some limitations affect litigation generally: it can be slow, expensive, and adversarial, straining commercial relationships, and it is conducted in public, exposing the parties' affairs to scrutiny, which commercial parties may wish to avoid.

Other limitations are particular to the cross-border dispute and are more serious. A party litigating internationally may face the uncertainty of jurisdiction examined in the previous module, with the risk of proceedings in competing forums; it may be obliged to litigate in a foreign court, in a foreign language, under a foreign procedure, before judges unfamiliar to it, which it may distrust or find disadvantageous; and, most significantly, it faces the difficulty examined in the previous sub-unit, that a judgment may be hard to enforce in the country where the other party's assets lie, the enforcement of foreign judgments being comparatively uneven. These limitations bear directly on the comparison with arbitration: the very features that make litigation strong domestically, its rootedness in a particular state's courts and authority, become weaknesses in the international setting, where neither party may wish to submit to the other's courts and where the resulting judgment may not travel well. It is for these reasons that international commercial parties so often choose, in place of litigation, the arbitration examined in the next sub-unit, which addresses several of these limitations, while for many domestic disputes litigation remains the appropriate course. The reader should weigh the advantages and limitations together: litigation is authoritative and well-suited to domestic disputes, but its limitations, especially in enforcement and in the submission to a foreign forum, lead international parties to consider the alternatives.

Suppose parties in different countries face a dispute under an international contract. Litigation would require one of them to submit to the other's courts, or would leave the forum uncertain, and any judgment obtained might be difficult to enforce where the assets lie; the proceedings would be public and might be slow and costly. These limitations, particularly the enforcement difficulty and the submission to a foreign forum, lead such parties often to prefer arbitration. The example shows the limitations of litigation that drive international commercial parties toward the alternatives.

The limitations of litigation are therefore its generality, that it can be slow, costly, adversarial, and public, and, more seriously in the cross-border setting, the uncertainty of jurisdiction, the submission to a foreign forum, and the difficulty of enforcing a judgment abroad, limitations that turn the domestic strengths of litigation into international weaknesses and that lead international commercial parties so often to choose the arbitration examined in the next sub-unit.