INTRODUCTION
THE RIGHT DISPUTE RESOLUTION STRATEGY CAN PROTECT YOUR BUSINESS
A company enters into a supply agreement with a distributor. Goods are delivered, invoices become overdue, and repeated demands produce no meaningful response. Meanwhile, the distributor disputes the quality of the goods and threatens a counterclaim.
The company now faces a critical decision: should it commence court proceedings, invoke an arbitration clause in the contract, or explore another form of dispute resolution?
The answer may affect how quickly the dispute is resolved, how much the company spends, whether sensitive business information becomes public, and how effectively a favourable decision can be enforced.
In Nigeria, arbitration is a legally recognised method of resolving commercial disputes. However, it is not automatically cheaper, faster or more effective than litigation in every circumstance.
The appropriate choice depends on the contract, the nature of the dispute, the urgency of the relief required, the parties involved and the commercial objective the company hopes to achieve.
For business owners, directors, investors and in-house counsel, the decision should form part of a wider risk-management strategy rather than a reaction to a dispute after it has escalated.
WHAT DOES NIGERIA LAW SAY ABOUT COMMERCIAL ARBITRATION?
The principal federal legislation governing arbitration in Nigeria is the Arbitration and Mediation Act 2023 (AMA), which repealed the former Arbitration and Conciliation Act, subject to the new Act’s transitional provisions. The Act provides a framework for domestic and international arbitration and supports the resolution of commercial disputes through an arbitral process.
The Act’s definition of commercial relationships covers a broad range of business activities, including trade in goods and services, construction, consulting, engineering, licensing, investment, financing, insurance and joint ventures.
This makes arbitration potentially relevant to disputes arising from:
• Commercial supply and distribution agreements.
• Shareholder and joint venture arrangements.
• Construction and infrastructure projects.
• Investment and financing transactions.
• Technology, licensing and intellectual property agreements.
•Consultancy and professional service contracts.
• International trade and cross-border commercial relationships.
The governing framework is not limited to the parties’ contractual rights. The wording of their arbitration agreement, applicable procedural rules, the chosen seat of arbitration and any relevant institutional rules can also influence how the dispute is handled.
The official legislative framework should be read alongside the contract and any applicable laws governing the underlying transaction. See the “Arbitration and Mediation Act 2023”.
WHEN SHOULD A COMPANY CHOOSE ARBITRATION INSTEAD OF COURT?
There is no universal rule that arbitration is preferable whenever a commercial disagreement arises. Nevertheless, several circumstances may make arbitration the more suitable option.
A. Where the contract contains an enforceable arbitration clause:
The first document to examine is the contract.
If the parties agreed to arbitrate disputes arising from their commercial relationship, the company should assess that agreement before commencing litigation.
Section 5 of the Arbitration and Mediation Act 2023 provides that where a court action concerns a matter covered by an arbitration agreement, the court must, upon a qualifying application made no later than the applicant’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is void, inoperative or incapable of being performed.
The section also permits arbitration proceedings to commence or continue while the court action is pending.
Consequently, filing a court action without first considering an applicable arbitration clause may lead to procedural complications, additional legal expenses and delay.
An arbitration clause should not simply be assumed to cover every disagreement between the parties. Its wording, scope, parties and enforceability must be examined.
B. Where the dispute requires specialist technical knowledge:
Some commercial disputes involve complex technical or industry-specific questions.
For example, a dispute over a power project may involve engineering performance, project milestones, contractual variations and payment certification. A construction dispute may involve defects, delay analysis and valuation of completed works.
Arbitration can permit the parties to appoint an arbitrator or tribunal with relevant expertise, subject to the agreement and applicable rules.
This can be valuable where understanding the commercial and technical issues is central to resolving the dispute.
However, specialist expertise should not be confused with a guarantee of a favourable outcome. The quality of the tribunal, the evidence presented and the applicable law remain important.
C. Where confidentiality is commercially important:
A public court dispute may expose sensitive contractual terms, financial records, business strategies or allegations concerning commercial conduct.
Arbitration may offer a more private process, making it attractive for disputes involving proprietary information, valuable commercial relationships or confidential transactions.
However, privacy and confidentiality are not identical. The extent of confidentiality depends on the applicable law, the parties’ agreement and the relevant institutional rules. Arbitration should not be presented as guaranteeing absolute secrecy in every circumstance.
Court applications, challenges to awards and enforcement proceedings may also bring aspects of a dispute before a court.
A company handling sensitive information should therefore consider express confidentiality provisions when negotiating its dispute resolution clause.
D. Where the parties need a neutral forum for an international transaction:
Cross-border transactions can create concerns about where a dispute will be heard and which legal system will apply.
A Nigerian company entering into an international joint venture, supply agreement or investment arrangement may prefer arbitration with an agreed seat, procedural rules and method of appointing arbitrators.
A carefully drafted arbitration agreement can reduce uncertainty about the forum and may improve the prospects of enforcing an award across borders.
Nigeria’s arbitration framework incorporates the New York Convention regime for the recognition and enforcement of qualifying foreign arbitral awards. Actual enforcement remains subject to applicable legal requirements and any available grounds for refusing recognition or enforcement.
For an international contract, the company should assess the counterparty’s asset locations, the proposed arbitral seat and the relevant enforcement regime before agreeing to arbitration.
E. Where preserving a commercial relationship is desirable:
Not every commercial dispute requires the parties to become permanent adversaries.
A supplier may still need the customer. A developer may depend on a contractor to complete a project. Joint venture partners may have invested substantial capital in a shared enterprise.
Arbitration may provide a structured route to resolving a disagreement while limiting some of the public confrontation associated with litigation.
Nevertheless, arbitration is an adjudicative process: the tribunal determines the dispute and issues an award. It is not the same as mediation, where a neutral third party assists the parties in reaching their own settlement.
If preserving the relationship is the overriding objective, negotiation or mediation may be appropriate before or alongside arbitration, where the contract and applicable rules permit.
3. WHEN IS COURT LITIGATION THE BETTER OPTION?
Arbitration is not always the most commercially sensible choice.
A. Where urgent judicial intervention is needed –
A company may need immediate relief to protect assets, preserve evidence, prevent an imminent harmful act or maintain the status quo.
The Arbitration and Mediation Act 2023 recognises interim protective measures. Sections 19 and 20 address, respectively, court-ordered interim protection and interim measures available through an arbitral tribunal.
Depending on the circumstances, a company may seek appropriate court protection in support of arbitration rather than abandon arbitration altogether.
The distinction is important: the need for urgent court intervention does not automatically mean that the underlying dispute must be determined through full court litigation.
Legal advice is particularly important where delay could cause irreversible harm or frustrate enforcement of a future award.
B. Where the dispute involves parties who did not agree to arbitrate –
Arbitration ordinarily depends on a valid arbitration agreement binding the relevant parties.
A dispute involving several companies, directors, guarantors, subcontractors or other persons may present difficulties if some are not bound by the clause.
The company must consider whether the relevant claims can properly be resolved in one forum or whether separate proceedings may become necessary.
This is especially important where the dispute arises from interconnected contracts containing inconsistent dispute resolution provisions.
C. Where cost and proportionality favour litigation –
Arbitration can involve arbitrator fees, institutional charges, hearing venue expenses, expert fees and legal representation costs.
For a relatively small debt or straightforward contractual claim, these expenses may be disproportionate to the amount in dispute.
Court litigation also involves costs and potential delay, but the appropriate comparison must be based on the particular court, procedure, case complexity and expected duration.
A company should compare the likely total cost of each route rather than assume that arbitration is necessarily the cheaper option.
D. Where the dispute requires remedies or procedures better suited to court –
Certain disputes may require procedures, orders or participation by parties that cannot conveniently be accommodated through the proposed arbitration.
A company should examine the precise remedies sought, the legal basis of its claim, the persons whose rights are affected and the powers available in the chosen forum.
Where the dispute involves statutory rights, regulatory action, public law issues or other matters subject to special jurisdictional rules, a lawyer should assess whether arbitration is legally available and appropriate.
The mere inclusion of an arbitration clause does not automatically make every possible dispute arbitrable.
5. WHAT HAPPENS WHEN THE CONTRACT ALREADY CONTAINS AN ARBITRATION CLAUSE?
A company should not ignore an arbitration clause simply because the other party has defaulted or negotiations have failed.
The practical steps usually include the following:
Step 1: Review the contract. Identify the precise clause, its scope, the applicable rules, the seat of arbitration and any pre-arbitration negotiation or mediation requirements.
Step 2: Identify the dispute. Establish the contractual obligations allegedly breached, the remedies available and the evidence supporting the claim.
Step 3: Check compliance with preconditions. Determine whether the agreement requires a notice of dispute, negotiation, mediation, a technical determination or another preliminary step.
Step 4: Confirm the commencement procedure. Depending on the agreement, the applicable rules and whether an institution is involved, proceedings may begin by filing a request or notice for arbitration and serving it in accordance with the applicable requirements.
Step 5: Assess interim protection and enforcement. Consider whether urgent measures are necessary and where the counterparty’s assets are located.
Step 6: Obtain advice before commencing parallel proceedings. A poorly coordinated court action and arbitration may increase cost and complicate the dispute.
NOTE: The procedure is not identical in every arbitration. The contract and applicable rules determine the appropriate route.
CAN A COMPANY STILL GO TO COURT IF AN ARBITRATION CLAUSE EXISTS?
In appropriate circumstances, yes, but the position requires careful analysis.
Under section 5 of the Arbitration and Mediation Act 2023, a party may request referral to arbitration when a court action concerns a dispute covered by an arbitration agreement, provided the statutory timing requirement is met.
The court may decline referral if the agreement is void, inoperative or incapable of being performed.
The Act also recognises the role of courts in supporting arbitration, including interim protective measures and the enforcement or setting aside of awards under the applicable statutory framework.
The correct approach depends on the purpose of the proposed court action. An application for urgent protective relief is different from asking a court to determine the underlying contractual dispute.
Companies should therefore obtain legal advice before filing a claim, responding to proceedings or taking procedural steps that could affect their rights under an arbitration agreement.
COMMON MISTAKES COMPANIES SHOULD AVOID
Several errors can undermine an otherwise sound dispute resolution strategy. Such include:
• Treating arbitration as automatically faster or cheaper. Tribunal fees, experts, procedural disputes and enforcement can increase expenditure.
• Using a vague arbitration clause. Uncertainty about the scope of disputes, appointment procedure, seat or applicable rules may generate avoidable disputes.
• Ignoring notice and escalation requirements. Failure to comply with contractual preconditions may create procedural difficulties.
• Starting litigation without reviewing the contract. An applicable arbitration clause may affect how the court action proceeds.
• Assuming an award guarantees payment. Recovery depends on the respondent’s assets, compliance and the available enforcement mechanisms.
• Overlooking limitation periods. A company should not assume that negotiations or internal correspondence automatically suspend a limitation period.
• Failing to preserve evidence. Contracts, invoices, delivery records, emails, meeting minutes, expert reports and payment records may be central to the claim or defence.
The earlier these issues are addressed, the more options a company may retain.
HOW TO CHOOSE THE RIGHT DISPUTE RESOLUTION STRATEGY
Before deciding between arbitration and court litigation, management should work with its legal advisers to answer seven questions:
1. Does the contract contain a valid arbitration clause covering this dispute?
2. What amount is in dispute, and what is the likely total cost of each option?
3. Is urgent interim relief required?
4. Are all necessary parties bound by the proposed dispute resolution process?
5. Is confidentiality, technical expertise or a neutral international forum especially important?
6. Where are the counterparty’s assets, and how will a decision be enforced?
7. What outcome best protects the company’s commercial position?
These questions shift the analysis away from a simple preference for arbitration or litigation and towards a decision informed by legal rights, business realities and recoverability.
WHEN SHOULD A COMPANY SEEK LEGAL ADVICE?
Professional legal advice may be appropriate before signing a high-value commercial contract, when a counterparty breaches an agreement, when an arbitration notice or court process is received, or when the company is considering urgent protective measures.
A lawyer can review the dispute resolution clause, assess jurisdictional and procedural issues, identify available remedies, evaluate the evidence and develop a proportionate resolution strategy.
For in-house counsel, this analysis should also consider financial exposure, business continuity, reputational implications, management reporting and the risk of similar disputes arising under other contracts.
FREQUENTLY ASKED QUESTIONS
1. Is arbitration legally binding in Nigeria?
An arbitral award is binding on the parties, subject to the applicable law and any available statutory grounds for challenge or refusal of enforcement. The Arbitration and Mediation Act 2023 provides the relevant framework.
2. Is arbitration cheaper than court litigation?
Not necessarily. Arbitration may involve arbitrator and institutional fees in addition to legal expenses. Its commercial value depends on the amount in dispute, complexity, procedure and expected enforcement costs.
3. Can a company choose arbitration after a dispute has arisen?
Yes, if the relevant parties agree to submit the dispute to arbitration and the arrangement is legally effective. A pre-existing arbitration clause is not the only possible basis for arbitration.
4. Can a Nigerian court intervene in an arbitration?
Yes. The Arbitration and Mediation Act 2023 provides for specified court functions, including interim protective measures, appointment-related functions in appropriate circumstances, and processes concerning recognition, enforcement and setting aside of awards.
5. Are arbitral proceedings confidential?
Arbitration is generally conducted privately, but privacy does not automatically guarantee absolute confidentiality. The applicable law, agreement, rules and any related court proceedings must be considered.
6. Can an arbitral award be enforced against a company that refuses to pay?
An award may be taken through the applicable recognition and enforcement process. The practical outcome depends on the relevant legal requirements, available assets and any valid grounds for resisting enforcement.
7. Should a company arbitrate every commercial dispute?
No. Arbitration should be assessed against the contract, the nature and value of the claim, the remedies required, the parties involved, cost and enforceability. Negotiation, mediation or court proceedings may be more appropriate in some cases.
CONCLUSION: CHOOSE THE FORUM THAT PROTECTS YOUR COMMERCIAL INTERESTS
The choice between arbitration and court litigation is not merely a procedural decision. It can influence the cost of resolving a dispute, the protection of business information, the management of contractual relationships and the prospects of recovering money or securing other relief.
For Nigerian companies, the strongest approach is to review dispute resolution provisions before problems arise and evaluate available options promptly when a dispute develops.
If your company is facing a contractual dispute or reviewing the dispute resolution provisions in its commercial agreements, obtain a tailored legal assessment before deciding on the next step.