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Let us see the meaning of these two terms:
Arbitration: The submission of dispute to an unbiased third person designated by the parties to the controversy, who agree in advance to comply with the award. Arbitration is well established and widely used means to end disputes.
Litigation is the term used to describe proceedings initiated between two opposing parties to enforce or defend a legal right. Litigation is typically settled by agreement between the parties, but may also be heard and decided by a jury or judge in court. In addition to the actual lawsuit, pre-suit negotiations, arbitrations, facilitations and appeals may also be part of the litigation process.
So, Litigation is quite broader term and it may go up to the court of law. In international procurement cases, the purchaser prefers to keep the disputes to arbitration level for simplicity as if it goes to court, it may take a long time to complete the process.
The security in question is appropriately a performance security: Before award of work, the purchaser wants to confirm that the supplier will execute the work when awarded and ask the supplier to submit a performance security (normally ten percent of contract value). Performance security shall remain valid after completion of work and up to warranty period (six months to one year). So, we see that a Performance Security is to ensure for the due performance of the Contract in terms of quality and timeliness