Depending on how the contracting parties agree to resolve their (potential) dispute, the proceedings may last only a few months or a few years. In addition to legal expenses and following opportunity costs, litigation may affect the parties’ reputation, and consequently, their business interests.
Also, international agreements are often characterized by burdensome negotiations about the competent court for the case of dispute, as the neutrality of a foreign court can sometimes be brought into question.
These issues may be prevented by using an alternative method for dispute resolution, which is based on a mutual agreement of the parties – an arbitration.
Arbitration overrides the competencies of a national court and establishes a private “court” suitable to the parties’ needs and requirements of the case.
Although arbitration is a creature of contract, once the process is initiated, arbitration acquires jurisdictional characteristics. In other words, by reaching an agreement to submit their dispute to the arbitrator, parties are waiving their rights to pursue litigation (neither party is allowed to file a lawsuit against the other before any court).
If parties decide to arbitrate their case, they on the disposal of the two types of arbitration:
- ad hoc arbitration
Institutional arbitration typically operates within a certain chamber of commerce, it has its administration and rules (for instance, ICC International Court of Arbitration, or Belgrade Arbitration Center).
On the other hand, ad hoc arbitration is a “court” created by the parties specifically for that one case. In conclusion, which type of arbitration provides more advantages predominantly will depend on the parties’ good faith and the value of the subject of the dispute.
In contrast to the standard litigation procedure, where the parties have very limited abilities to affect the appointment of a certain judge, the arbitration allows the parties to nominate the desired person to finally settle their dispute. Hence, the parties can be assured that the person who is entrusted to decide on the outcome of their case is indeed a subject matter expert.
Although appointing one arbitrator provides for lower costs and a swift procedure, in some situations the parties may not be able to come to an agreement regarding who that arbitrator will be. In that case, a widespread solution is that each party will nominate one arbitrator, and then, those two will designate the third arbitrator. That foresees greater impartiality and distributes the burden of the decision-making process between the arbitrators equally.
There are no restrictions regarding the number of arbitrators involved but the arbitration fees proportionally rise with every additional arbitrator. Therefore, it is not common to appoint more than three arbitrators, even in more complex cases.
No specific qualifications are required for being an arbitrator. Usually, the parties will nominate a senior attorney, a judge, or a law professor. It is recommendable that parties choose the arbitrator who is a legal specialist, considering that an arbitration award has the same legal force as a court’s decision, and the same general legal principles apply to it. However, if the dispute is related to the provision of services in the IT industry, the parties may agree to appoint an IT expert and/or a business consultant to join the arbitral panel as well.
International agreements allow the parties to choose the law which will govern their contract (substantive law). The parties will often compromise and subject the agreement to a credible law of a third country. In that case, the contract contains the applicable law clause, and the arbitrator will act and construe relevant facts in accordance with it.
However, if the parties did not choose the substantive law, the arbitrator will have more room for maneuver. Primarily, the arbitrator shall follow the rules of the arbitral seat, which usually refer to “appropriate” rules, under the arbitrator’s discretion. The arbitrator may consider it appropriate to apply a combination of all potentially relevant laws.
One of the advantages of arbitration over litigation is that, in arbitration, the parties, or the arbitrator, may subject the dispute to lex mercatoria – generally accepted transnational rules and customs.
Moreover, disputes arising from commercial contracts may be resolved by taking into account, for example, a well-known legal principle of “according to the right and good” (lat. ex aequo et bono). Finally, in international commercial arbitration, widely accepted and used are the neutral rules of the United Nations Commission on International Trade Law (UNCITRAL) – UNCITRAL Arbitration Rules.
The arbitral procedure tends to commence shortly upon the submission of the request for arbitration. Its efficiency also reflects in a common rule, that the arbitrator is obligated to award the decision in a certain period (usually 6 months). Also, deadlines and hearings are scheduled at the parties’ convenience and in their interests.
The entire dispute resolution process is flexible and customizable, so it can easily be conducted remotely. These characteristics of arbitration have proved to be highly useful and helpful in the time of COVID-19. It is noteworthy that in such circumstances the expenses of arbitration are significantly reduced.
Even in cases when the arbitration is held remotely, the official place of arbitration, i.e., the “seat” is very important, as the arbitral award acquires the nationality of the place of arbitration. The national court of the country where the arbitration was formally conducted is the only court authorized to inspect and eventually annul the arbitral award. Thus, the arbitral seat is not necessarily the geographical location where the hearings took place, but a legal term with important consequences.
When deciding on the seat of their arbitration, the parties should always take into consideration:
- whether the desired country is a party to the New York Convention (relevant for enforceability of the arbitral award)
- grounds for annulling an arbitral award in that country
- effect of the national law on the applicable law(s)
- costs of organizing the hearings and travel to that country
Organizing an arbitration in Paris or London is not always advisable, as the disputes with a regional character may be more efficiently resolved on a local level.
The whole Arbitration process is financed by the parties as it is founded and operates on the parties’ request. To start with the procedure, the parties are obligated to cover the following expenses:
- registration fee
- administrative expenses
- fees for the arbitrator(s)
Depending on where the place of arbitration will be, parties may be required to cover certain additional expenses, such as travel costs for the arbitrator(s).
Under the general rule, both parties shall bear the administrative expenses and the arbitrator(s) fee equally, splitting the costs in half. However, the party initiating the procedure may be required to temporarily bear all the expenses (until the compensation) if the other party refuses to participate in the arbitration or cover its due costs.
The expenses depend on:
- the amount in the dispute
- whether the parties have opted for an institutional or an ad hoc arbitration
- the number of arbitrators and their fees
- place of arbitration (organizational and travel costs)
Institutional arbitrations typically have an approximate cost calculator available on their website, which can assist the parties to predict potential costs.
It is important to stress out, that the parties need to understand potential arbitration costs. If a party does not have the financial power to initiate and conduct arbitration, by signing the contract with an arbitration clause, such party may have unintentionally waived its right to resolve any dispute (and its right to justice).
Alternative dispute resolution mechanisms include arbitration, negotiations, and mediation. Contrary to the other two, an arbitral procedure is concluded with the adoption of a legally binding decision – an arbitral award.
Execution of a judgment of a foreign court is often coupled with many difficulties. However, an arbitral award can be easily enforced in almost every country in the world. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention) is one of the most widely ratified conventions globally. Evading to act pursuant to the adopted award is not very effective, so the parties are more prone to enforce the award willingly.
Following the nature of the arbitration, an arbitral award may be confidential as well. If the parties prefer to resolve their dispute in private, participants are not allowed to disclose to the public any information about their dispute or the final result. Trade secrets and lists of clients or partners will be kept confidential, thus the possibility of damaging the reputation and goodwill of the parties to arbitration is minimized.
Once adopted, the arbitral award is final – the dispute is settled, and there is no instance in which the parties can lodge an appeal. That provides for a faster and less expensive procedure, but on the other hand, it passes the responsibility of rendering a fair decision on the arbitrator(s) exclusively. Therefore, the expertise of the potential arbitrator(s) should be taken into consideration with great care.
Annulment of an arbitral award is not impossible, but it may be requested only due to a very limited number of reasons. Compared to the number of awards adopted, only a small percent of them were successfully set aside. The grounds for the annulment of arbitral awards predominantly depend on the laws applicable to the proceedings.
What would be more suitable for the need of the parties – institutional arbitration or ad hoc arbitration?
When starting their business relationship, parties are not focused on the dispute resolution clause, they act in good faith and do not expect to encounter any problems in the future. Consequently, some of the important elements of the arbitration clause may be left unregulated. That is where institutional arbitration comes in handy, providing its arbitral rules (for example ICC Arbitration Rules of the International Chamber of Commerce, or the Belgrade Rules from the Belgrade Arbitration Center).
In addition, institutional arbitration offers its list of arbitrators and its organizational bodies, which are authorized to manage the case and impose obligations on the parties. If the parties have decided to appoint only one arbitrator, and cannot agree on an adequate person, institutional arbitration will appoint one. But, before deciding on a specific arbitral institution, parties should always check the potential costs published online.
Ad hoc arbitration, especially under the UNCITRAL Arbitration Rules may guarantee a certain degree of security to the parties. However, as the parties may choose any set of rules to govern their arbitration, ad hoc arbitration is more dependent on the parties’ good faith and has limited options regarding a party’s obstructive conduct in the proceedings.
The advantages and disadvantages of arbitration should be analyzed altogether and concerning the practice of relevant court(s). Some controversial situations, like determining the responsibility of a third party may be better determined by a court.
Still, arbitration offers many benefits for commercial disputes. Parties are working together towards the final solution, by agreeing on how and when they will submit their statements, when the proceedings will take place, etc.
Before deciding on arbitration, parties should always consider:
Parties should bear in mind that the duration of litigation proceedings in Serbia is quite longer than in EU countries. Pursuant to Serbian law, the urgent procedure is not applicable to commercial disputes. Therefore, the parties may wait for months for the first court action and a couple of years for the final decision. Depending on the value of the dispute, the procedure before the Commercial Court may be significantly more expensive.
An adequate alternative may be found in arbitral institutions like Belgrade Arbitration Center, which is suitable to finally settle domestic and international disputes pursuant to the parties’ interests. The Belgrade Arbitration Rules provide a fair and efficient framework for dispute resolution, and its Code of Ethics expressly requires that the selected arbitrator is impartial, independent, dedicated to the case, and treats the dispute with confidentiality.
If the parties have not agreed on arbitration when they were concluding their contract, they still have not missed the chance to arbitrate. The parties are equally free to come to conclude an arbitration agreement once the dispute arises. But there is an inevitable risk that the other party will not be willing to waive its rights to pursue litigation. In that case, it is not possible to initiate arbitral proceedings.
Thus, although the dispute resolution clause is one of the last things discussed between the parties during the contract negotiations, the parties should always be aware of its importance and implications.