Is arbitration a better dispute resolution mechanism than court proceedings?

Arbitration proceedings Serbia

Many companies, when concluding business contracts, pay the least attention to the section that regulates the dispute resolution mechanism. Based on the belief that business cooperation will be carried out without disagreements and any disputed issues, business entities often do not regulate the way of resolving disputes in an adequate way. An inadequately defined dispute resolution mechanism or its complete absence leads to significant problems in the event of a dispute between the contracting parties, especially in the case of international cooperation, when the law may be applied to our contractual relationship, the consequences of which the companies are not even aware of. Because of the above, all business contracts should provide for an appropriate way of resolving disputes, taking into account the nature of the specific contractual relationship. In this sense, the parties to the contract can choose to resolve the potential dispute through the courts, with an agreement on the local jurisdiction of the court, or they can also opt for arbitration as a way of resolving disputes. Certainly, in order to maintain good business relations, the contract should first of all provide that the parties will try to resolve commercial disputed issues peacefully, and if this is not possible, provide for an appropriate method of resolution.

What it is important to regulate dispute resolution mechanisms

As we have stated, defining a precise and clear way of resolving commercial disputes in business contracts is extremely important. Although at the beginning of the business relationship, business entities do not think that there may be disputed situations, it is important to regulate this aspect in an appropriate way. When defining the method of resolving commercial disputes, it is important to bear in mind that in business relations it is important that the provided mechanism resolves the dispute in an efficient, economical, fast and safe manner. In this regard, the characteristics of judicial and arbitration dispute resolution are different, and they relate to the costs of the procedure, speed of dispute resolution and legal certainty. For this reason, it is important that the contract carefully defines and determines the mechanism that would best suit the contracting parties in relation to the resolution of potential disagreements.

The court dispute resolution mechanism is still the most dominant method of resolution, and the contracting parties can determine the local jurisdiction of the court, that is, they can choose which court will be competent to resolve a potential dispute. In addition to the above, the contracting parties can, if there is an element of foreignness in the contractual relationship, also provide for the applicable law that will be applied to the specific contractual relationship. In this way, the contracting parties can, in addition to choosing a court, also choose the applicable law for the contractual relationship itself, which the court will apply in the event of a dispute.

On the other hand, if the parties decide on arbitration as a way of resolving commercial disputes, they have the option of choosing both the governing law and the arbitrator who will decide the dispute.

Below, familiarize yourself with the features of these mechanisms in order to anticipate the appropriate way to resolve any future potential disputes.

Advantages of arbitration – speed, confidentiality and expertise

Although not the predominant method of dispute resolution, business entities increasingly opt for arbitration as a commercial dispute resolution mechanism. The reason for this is the speed and urgency of the procedure itself, but also the confidentiality and expertise of the person who makes the decision – the arbitrator.

Arbitration as a dispute resolution mechanism can be envisaged both in the case of a contractual relationship with a foreign element (international arbitration) and in the case of dispute resolution without a foreign element (internal arbitration).

In order for the dispute to be resolved through arbitration, the parties must agree to this mechanism, either through a separate arbitration agreement or through a separate arbitration clause in the contract governing the business relationship. What is important to keep in mind is that arbitration can be contracted to resolve only certain disputes. In this sense, if the exclusive jurisdiction of the court is provided for the resolution of a certain type of dispute, the parties cannot agree on arbitration. Therefore, a dispute must be eligible to be resolved through arbitration.

Arbitration agreement

Different types of arbitration

If the dispute is eligible to be resolved through arbitration, it should be foreseen whether the dispute will be entrusted to a permanent arbitration institution (institutional arbitration) or ad hoc arbitration. Institutional arbitration is most often organized within chambers of commerce and has regulated rules of procedure. The Belgrade Arbitration Center organizes the settlement of disputes with and without an international element, as well as the Permanent Arbitration at the Serbian Chamber of Commerce . One of the types of arbitrations conducted by the Belgrade Arbitration Center is stock market arbitration, i.e. the settlement of disputes arising from transactions on the Product Exchange in Novi Sad.

On the other hand, ad hoc arbitration represents a tribunal formed by the parties themselves for a specific dispute. One of the most important features of arbitration is the possibility for the parties to choose the arbitrator themselves, that is, the arbitrator who will decide the dispute. In this sense, the parties can choose to have the dispute resolved by one arbitrator, that is, a single arbitrator, or three, that is, more arbitrators (arbitration panel). In case the parties decide on a larger number of arbitrators, that number must certainly be odd. However, as a rule, and especially due to the optimization of the costs of the arbitration procedure, in practice it is most common for the parties to decide on an individual arbitrator or an arbitration panel of three arbitrators.

Unlike judges, arbitrators do not have to be lawyers, but it is necessary for them to be experts in the specific field in which the dispute occurred. So, in addition to the fact that the parties can choose arbitrators, which is not possible during court decision-making, the parties can choose experts from a certain field who will understand and resolve the commercial dispute in the best possible way. However, since the participation of a professional lawyer or lawyer is necessary for any dispute resolution, the parties to the proceedings usually decide to appoint them as arbitrators. Our lawyers have experience not only in representing the client in arbitration proceedings, but are also on the list of arbitrators qualified to resolve stock market disputes, which you can see here .

Finality and enforceability of the arbitration award

The decision made by the sole arbitrator or the arbitration panel is final and there is no possibility of applying a legal remedy against it. This means that the parties do not have the opportunity to review the correctness of the arbitration decision.

However, the parties can file a lawsuit to annul the arbitration decision, but only in cases specified by law, for example in the case that the arbitration agreement is not valid or one party is not allowed to present its views during the procedure. Despite the fact that the parties cannot file a legal remedy against the arbitration decision, the arbitration decision is equated with a domestic court decision, which means that it can be enforced just like a court decision. However, if it is a foreign arbitral decision, in order to equate it with a domestic legally binding court decision, it is necessary to first implement the procedure of recognition of such arbitral decision on the territory of the Republic of Serbia. Likewise, the decision of the arbitration court made in Serbia will be able to be recognized and enforced abroad, in more than 160 countries.

What are the costs of arbitration proceedings?

Arbitration costs depend on several factors, but it can undoubtedly be concluded that they are higher than court costs. The parties must bear in mind that they bear the costs of the arbitration procedure themselves, because they are the ones who initiate it. It is certain that the costs of arbitration depend on the venue of the arbitration, and the fact whether the parties have opted for institutional or ad hoc arbitration. Furthermore, the amount of the costs of the procedure depends on the number of arbitrators appointed by the parties and on the value of the subject of the dispute.

Although a more expensive way of resolving disputes than the court, arbitration can often be more profitable in terms of the time required to resolve the dispute, the expertise and expertise of the arbitrator, but also the confidentiality of the procedure itself. In order to be able to calculate the costs, you can use the calculator on the website of some of the institutional arbitrations to create an estimate of the costs, including the administrative costs and the amount of the arbitrators’ fees. Also, as a rule, the parties will be obliged to advance a certain amount of costs.

Court settlement of commercial disputes – formality and legal protection

A more frequent but also slower way of resolving disputes is certainly the mechanism of dispute resolution through the courts. As we have stated, in this case the parties can determine which court will have local jurisdiction to resolve the dispute, unless the exclusive local jurisdiction of a certain court is provided for resolving some type of dispute (for example, real estate disputes). However, this choice also exhausts the possibility of the parties to choose certain characteristics of judicial settlement of disputes.

Unlike arbitration, in court settlement of disputes, the same is decided by a randomly assigned judge. Although the legal expertise of judges is taken for granted, they are often not experts in the specific areas from which the dispute arises. For this reason, the law provides for expert testimony and the participation of expert advisers in the procedure, as experts who have knowledge that the judge does not have. Additionally, the dynamics of holding hearings where the dispute in question will be discussed does not depend on the will of the court to resolve the dispute quickly, but on the judge’s workload. In this respect, the law does not even prescribe the deadlines in which judges must act and complete the proceedings.

However, what provides the parties with a certain type of legal protection is the fact that a legal remedy can be declared against the court decision made in the first instance. This means that the party dissatisfied with the court’s decision can challenge it through a legal remedy and that the second-instance court will re-examine all the facts of the dispute in question and make a decision based on the appeal. In addition, for certain types of disputes, it is possible to file an extraordinary legal remedy and thereby review the second-instance decision of the court.

The mentioned mechanism provides legal protection because in this way the courts of higher instances consider the dispute in question and the decision of the lower courts, and there is a possibility that the court’s decision can be changed or canceled and returned for a new procedure. The foreseen mechanism enables the parties to have another court consider the argumentation and evidence once again, and in this way check the correctness of the challenged decision.

However, in the case of the second-instance procedure, the resolution of the dispute takes at least 2 years, which can significantly affect the party’s decision whether to opt for this dispute resolution mechanism. In addition to the above, the proceedings before the court are public, and exclusion of the public is possible only in precisely foreseen cases.

When to choose arbitration and when to go to court?

When choosing a mechanism, you should first of all be guided by the subject matter, nature and complexity of the commercial dispute. Although settling disputes before arbitration has many advantages, when making a decision, you should also take into account the practice of the courts regarding the specific disputed situation and investigate whether a specific judicial practice has already been formed with regard to such a dispute.

However, although special rules of procedure apply to commercial disputes, they do not guarantee the urgency of resolving these disputes, nor are there prescribed deadlines in which the court is obliged to act. On the other hand, the costs of court proceedings (including attorney’s fees, the costs of producing certain evidence and the costs of court fees) depend on the value of the subject matter of the dispute and are lower than the costs of arbitration proceedings.

Considering the characteristics of both mechanisms, when deciding which one to choose to resolve the dispute, the parties should be guided by the facts related to the value of the subject of the dispute, the need to resolve the dispute urgently, the confidentiality of the proceedings and, finally, the relationship between the parties.

In addition to the above, it is very important to take into account the nature of the dispute and its complexity, because sometimes a certain dispute will be effectively resolved before arbitration, despite the higher costs that may arise. This is due to the fact that arbitrators are experts from certain fields that the parties themselves choose, and thus they can be sure that an expert from a certain field will decide on the dispute in question.

Bearing in mind the importance and implications of the dispute resolution clause, it is important to pay enough attention when concluding the contract and foresee the most adequate way to resolve a potential future dispute. Although at the moment of entering into a contractual relationship, it is primarily important for the parties that the established business cooperation is successfully maintained, the contract as a kind of legal protection mechanism should also provide for mechanisms for resolving potential dispute situations.

This article is for informational purposes only and does not constitute legal advice. If you need additional information regarding the topic in question, please feel free to contact us by email at office@ncrlawyers.com or by phone at +381677049551.