13 Jan, 2020

Arbitral Dispute Resolution – Serious competitor to State Judiciary?

  1. Defining arbitration

There is no universally accepted definition of arbitration as a way of resolving disputes. Attempts have been made to define it, albeit unsuccessfully.  Defining it is mission impossible owing to its multifaceted characteristics, and is only exacerbated by the existence of domestic, and international arbitration.

Primarily, to grasp the essence of arbitration, it should be noted that this is an alternative mechanism of resolving disputes, therefore, without recourse to courts of law.  The parties at odds can go to court and initiate litigation.  Alternatively, arbitration is another avenue for settling the dispute.  Arbitration is not only reserved for private-law disputes; here the state can also appear as claimant or respondent.

  • How does one entrust a dispute to an individual, individuals or an institution other than a court?

The story of arbitration is as old as humanity itself.  Before the emergence of states and therefore courts, when tribal order was to the fore, there were envoys who resolved conflicts between members of the tribe on behalf of the leaders.  The first rules of procedure emerged in Ancient times, and commercial disputes were settled by arbitration in the Middle Ages.  However, arbitration as we know it today experienced a post-World War II expansion of such magnitude that the international community was interested in codifying it under conventions, and states increasingly sought to enact their own arbitration laws.  The interest of states in regulating arbitration provides reliability and security for potential parties.  At the same time, it is a way to dissolve the judiciary of a state by resolving a number of disputes before arbitration.  Interest was also piqued in the former Yugoslavia, where the government passed the Regulation of the Chamber of Commerce of the Federal Republic of Yugoslavia, which established The Foreign Trade Court of Arbitration.  Today it is a Permanent Arbitration at the Chamber of Commerce and Industry of Serbia.  The law governing this area in the Republic of Serbia is the Arbitration Act (the “Law“) adopted in 2006.

Another aspect of this issue is how arbitration gains the “power” to decide on a particular dispute.  It is first and foremost about the autonomy of will, which is essentially the beginning and end of the whole story of entrusting the resolution of a dispute to a person or persons independent of the state apparatus.  Autonomy of will shapes arbitration, but it is not unlimited, it is framed by laws and international instruments.  In this regard, the parties choose who will decide what the procedure will look like, whether the tribunal will decide by law or ex aequio et bono; they can also arrange the smallest details (e.g. how submissions will be made) as long as it complies with national and international legal standards and regulations.

  • A lawsuit –  a(n) (un) friendly act

Concluding a contract involves fulfilling a certain goal – to settle mutual obligations.  If we move the above into the field of economic relations, it should lead to better business performance of both parties, especially if the business relationship is long-term in nature.  When one party fails defaults, the other will undoubtedly take steps to obtain a contractual act.  If a creditor chooses to file a lawsuit and bring a case to court – this may be a step that the debtor will perceive as hostile.

It is certain that the obligation is not fulfilled and that the resulting dispute must be resolved.  Initiating arbitration proceedings is a friendlier act because there is no lawsuit, in the classic sense of the word, proceedings are shorter, and may also indicate a willingness to continue business cooperation.  Furthermore, arbitral proceedings, unlike litigation, are closed to the public.  One of the advantages of the unpublicized nature of arbitration proceedings is the fact that the parties can avoid the negative press that might ensue if they were to lose the dispute, as well as the burden of being in a dispute at all, the pressure that victory must be secured at all costs in order to preserve a dominant position on the market.  Confidentiality also means greater negotiating flexibility and bolsters the chances of an amicable settlement.

  • Arbitration – “no-man’s land” for dispute resolution

Disputes between individuals and business entities are par for the course, and the issue of entrusting their resolution should also be considered from the aspect that will guide the decision-makers.

As it is more common for a dispute to arise in trade relations with a foreign element, the parties may decide to bring the dispute before a court of the State of one of the parties.  Courts are often biased against an entity from their home territory, which means that an impartial decision is less likely.

When agreeing on arbitration, the parties have a multitude of choices, starting with the choice of the arbitrator or arbitrators who will settle the dispute, place of arbitration, the arbitration rules governing resolution of the dispute, the choice of substantive law that will apply, all of which contribute to the impartiality and quality of the final award.

  • Types of Arbitration

a) Ad hoc and institutional arbitration

Arbitration is a neutral ground for dispute resolution.  The parties have the freedom to choose arbitrator(s), the freedom to contract procedural rules and iron out related issues, such as administration of arbitration.  All these are the main features of ad hoc arbitration.  This kind of arbitration is used to resolve a particular dispute from scratch.  The parties, therefore, tailor a framework to their needs.  This applies in particular to the selection of arbitrators – the dispute may be settled by an individual arbitrator or an arbitral tribunal, and the parties may also make the choice with respect to the personality of the arbitrator.   Namely, some disputes call for expertise in a particular field, so it is not uncommon if the arbitrator is, for instance, an engineer, and not a person with a legal education.  The advantage of this type of arbitration is certainly the ability of the parties to settle all issues by agreement, but the other side of the coin is that the agreement must also cover “the back office” tasks.  This type of arbitration also relies on cooperation between the parties, as they are expected to agree on a wide range of issues.  However, even in the absence of a written or subsequent agreement between the parties to administer the arbitration (e.g. the parties failed to agree the seat of arbitration, number of arbitrators, etc.), the arbitration doctrine during its development has crystallized certain rules that apply.  In that respect, there are, for instance, UNCITRAL rules that in most cases are either contracted or applied to ad hoc arbitrations.  These rules govern the administration of arbitration and help overcoming procedural issues.

Cooperation between the parties is not so important if they have agreed to institutional arbitration – where an agreement on the choice of arbitration institution will suffice.  Arbitration institutions are institutions that administer the arbitration.  When deciding which institution to entrust with resolution of the dispute, the parties also indirectly choose the procedural framework, as institutional arbitrations have their own procedural rules.  Institutional arbitration is certainly more practical in terms of administering the procedure, but on the other hand it can be more expensive than ad hoc arbitration.  The most famous arbitration institution in the world is the International Court of Arbitration based in Paris (“ICC“).  Other prestigious institutions worthy of a mention include the International Center for Settlement of Investment Disputes (“ICSID“), the German Arbitration Institute (“DIS“), London Court of International Arbitration (“LCIA“), American Arbitration Association (“AAA“) and others.  Also, a special mention goes to the two arbitration institutions in the Republic of Serbia, the Belgrade Arbitration Center (“BAC“), as well as the aforementioned Permanent Arbitration at the Chamber of Commerce and Industry of Serbia.

b) Is the arbitration international or domestic?

This distinction is made with regard to whether or not arbitration has a foreign element.  Some countries do not make this distinction at all, while Serbia belongs to a number of countries that explicitly recognize this distinction.  Article 3 of the Arbitration Act defines international arbitration as arbitration whose subject matters are “disputes arising from international business relations.”  Furthermore, it lists cases where arbitration shall be considered international:

  • If the parties to an arbitration agreement have, at the time of concluding that agreement, their places of business in different countries;
  • If the place where a substantial part of the obligations of the business relationship is to be performed or the place with which the subject matter of the dispute is most closely connected (even if the parties have their places of business in the same country);
  • If the parties have agreed that the place of arbitration is in a third country;
  • If the parties have expressly agreed that the subject matter of the arbitration agreement covers more than one country.
  • How to arrange Arbitration?

If a dispute arises between the parties, they can go to court which will issue a ruling after it hears the case.  The procedure before the court is regulated by law, and it is initiated by a lawsuit that must be properly drafted in line with the procedural law.  Also, a key feature of litigation is that it is conducted in stages, and there is a set of actions that the parties must take during the proceedings in order for a ruling to be made on the dispute.  A party, whenever it considers that its rights are being violated, can file a lawsuit with the competent court, as opposed to arbitration where parties’ freedom to initiate arbitration is conditional – there must be unambiguous agreement between the parties to resolve any dispute through arbitration.  Thus, dispute resolution through arbitration depends exclusively on the will of the parties. But at what moment does will exist and what form does it have to take?

The first option is an arbitration clause – a clause included in the contract whereby the parties agree that any disputes arising from the contract are to be referred to arbitration.

The second option is to conclude an arbitration agreement.  This is concluded when a dispute has already arisen.

Drafting an arbitration clause is an artform in itself, as one must take into account any issues that, if not properly and clearly arranged, could lead, in a particular case, to misinterpretation of the will of the parties, and so the arbitration clause can be deemed ineffective or declared null and void.

The arbitration clause must contain all the elements clearly pointing to the will of the parties to resolve any dispute through arbitration.  What the parties can do when concluding a contract is to immediately select an arbitration institution, to choose an arbitrator or arbitrators if it is an ad hoc arbitration, and they can agree on other matters.  It is essential that the will to arbitrate exists and that the clause is unambiguously worded so it can begin its ”legal life” and fulfill its purpose.

  • To judge or to arbitrate?

As stated, a dispute can be settled before a court or before arbitration.  How to choose?  To answer this question parties need to have an understanding about both proceedings, and just as important, how long they can take.

In the Republic of Serbia, litigation is governed by the Civil Procedure Act, which “governs the rules of procedure for the provision of judicial redress, which are handled and decided in litigation to resolve disputes arising from violations of personal rights and disputes arising from family, labor, commercial, property and other civil law relationships, except for disputes for which a different type of procedure is stipulated by a special law” (Article 1 of the Civil Procedure Act).  Thus, a wide range of legal issues can be heard in civil proceedings.  All actions in civil proceedings are undertaken in writing (by filing) and orally (at hearings.)  The main characteristic of civil proceedings is that they are conducted phase-by-phase, i.e. in stages.  The first stage is filing a lawsuit, followed by the response to the lawsuit.  The next stage is a preliminary hearing.  The third stage is the main hearing where the evidence is presented (in which case there can be 15-20 hearings, depending on the complexity of the dispute), the ruling stage, and finally rulings on appeals which often reach the third instance court.  This makes litigation time-consuming, complicated and inefficient.  The length of the proceedings also brings with it legal uncertainty, which is particularly reinforced by the parties’ ability to propose a timeframe for litigation, the possibility of postponing a hearing due to obstruction by the parties and other participants in the proceedings, or lethargy on the part of the judge, or even abuse of procedural powers.  It is not uncommon for courts to schedule the next hearing one year after a postponed one.  And when the first instance court finally issues its ruling, an appeal(s) against the ruling make for a long wait for closure on the matter.  This is because the appeals procedure is complicated and slow. It prolongs the agony, and makes the final ruling often worthless and unenforceable, although the party got “on paper” what it sought.  All of the above makes litigation a slow, uncertain and inefficient way of resolving disputes. Litigation in Serbia (from filing a lawsuit to a final and binding ruling) can in most cases last up to 3 years, or even up to 10 years in other cases.

To overcome these difficulties, the solution is to make provision for an arbitration clause.

Arbitration proceedings are very similar to litigation.  But unlike court proceedings, arbitration proceedings are simple, fast, efficient, and therefore the decision is enforceable.

Arbitration proceedings is initiated by a Request for Arbitration (depending on arbitration rules sometimes it is called a Notice of Arbitration), i.e. a claim.  As in litigation, there is a possibility to respond to a claim, a hearing could be held, filings are made; actions taken before the courts can also be taken in  arbitration, and although those actions should not per se delay the proceedings, delays occur just because they are taken before the court, and because the parties often abuse their procedural powers.  In addition, most disputes continue to be heard by the courts, the workload of each judge should be taken into account, and therefore it is not difficult to grasp the problems facing judiciaries in various states, especially the judiciary in the Republic of Serbia.

Arbitral dispute resolution is also expedited by the fact that there is no possibility of appeal.  Of course, there are mechanisms (court proceedings) for setting aside an arbitral award in the event it is unlawful, but such proceedings are very rarely initiated because the grounds for setting aside arbitral awards concern violation of public policy, or if one of the parties has not been afforded its fundamental right such as the right to debate, or similar rights.  The very process of setting aside an arbitral award does not delay its enforcement.  By stipulating an arbitration clause, the parties “waive” the right to appeal, an avenue which in any case is not open.  Unlike the almost never-ending duration of litigation, the arbitration process (from filing a lawsuit to an enforceable decision) lasts six months to a year, again depending on the complexity of the dispute.

  • “Penny-wise and pound-foolish”

This idiom is most appropriate, especially when deciding where the dispute resolution forum – court or arbitration.  Stereotypes aside, court proceedings are certainly not cheap, given the court fees and other costs related to court proceedings, fees and rewards to attorneys, etc.

However, public opinion holds that litigation is cheaper than arbitration and that arbitration is reserved for wealthier parties.

Of course, this must not be taken as true a priori.  Court proceedings, as mentioned, can involve both regular and extraordinary appeal mechanisms, which certainly increases the costs, first of all in terms of court fees and attorneys’ fees, but also in the form of lost time, since there is the possibility of a ruling being vacated and returned for consideration.  Time lost is money lost, especially in commercial disputes.  We are also cognizant of the fact that the time it takes a ruling to become enforceable can make it “a dead letter”.  For example, in four years, which is the average duration of court proceedings in the Republic of Serbia, a debtor can be left without property, go bankrupt, or the decision itself will no longer have the effect it would have if the dispute had been completed within 6 months to a year (e.g. intellectual property disputes, construction disputes, disputes regarding bank guarantees, etc.).

Arbitration is certainly a cheaper way to resolve disputes, especially considering its duration, one-step decision-making and cost predictability.

  • When is arbitration “powerless”?

Arbitration is not a one-stop dispute resolution shop.  The nature of some legal relationships simply does not allow for a dispute to be resolved by any other person than a judge.  This is the case with disputes concerning ​​family law, inheritance law, bankruptcy law, and in other domains where the state is particularly interested in having its say, i.e. when there is exclusive jurisdiction of the courts.  Sometimes, legal disputes have a specific status.  Company by-laws or an employment contract can make provision for amicable settlement of disputes between employer and employee, i.e. arbitration.  However, in labor disputes, an arbitration clause does not mean an obligation to initiate arbitration, rather the option.  In the event of a dispute being brought before a court, the court would not declare itself incompetent to hear the case, e.g. property disputes in which the arbitration has been agreed.  On the contrary, if the other party rejects the proposal to settle the dispute by arbitration, the dispute can only be settled before a court.

In other cases not concerning the abovementioned, parties are free to stipulate arbitration clause, i.e. arbitration would be possible.

  1. Appealing an arbitral award

An arbitral award is similar to the final and binding ruling of a court. i.e. the matter at hand cannot be re-heard.  An arbitral award is deemed enforceable the moment it is rendered.  At first glance, arbitral awards appear irrevocable.

Namely, the Arbitration Act makes provision for annulment of arbitral awards.  The proceedings are initiated before the court by filing an application to set the award aside.  An application can be filed within 3 months of receipt of the award by the party seeking its annulment.  The grounds for setting aside the award are set forth in Article 58 of the Arbitration Act and include, inter alia, invalidity of the arbitration agreement, the arbitral award is based on a false witness statement, the award is contrary to public policy, etc.  Where a court rules that the award is null and void, or dismisses the application, its ruling may be subject to regular and extraordinary legal remedies.  However, proceedings challenging the validity of an arbitral award do not delay its enforcement.

The setting aside of an arbitral award is the only avenue of appeal against an arbitral award under Serbian law.  When probing an arbitral award, the court does not act in the capacity of a court of second instance, therefore, the court does not review the quality of the decision – whether it is contrary to substantive law, whether the facts are have been fully and properly weighed, etc.  The legislator made provision only for those violations that substantially impair the integrity of the procedure.  Also, an application for setting aside can be made only against a domestic arbitral award.  The possibility of annulling an arbitral award is, therefore, restricted and used in a limited number of cases.

  1. Recognition of the arbitral award

In many cases, disputes concern international business relationships – between parties domiciled in different countries.  The decisions they make, whether judicial or arbitral, should apply in a country other than the state on whose territory those decisions were made.  In order to achieve this, the decision must be recognized – its effect must be the same as the effect of rulings made in the country in which recognition is sought.

In Serbia, the high courts and commercial courts have jurisdiction over the recognition of foreign court rulings, and the procedure and conditions for recognition are governed by the Conflicts of Law Act.  The assumption for recognizing an award is that there is reciprocity between the country of origin of the award and the Republic of Serbia.  Recognition may also be withheld – if the decision is not legally binding under the law of the country where it was rendered, where the Serbian judiciary had exclusive jurisdiction to resolve the dispute, or if the ruling was contrary to public policy of the Republic of Serbia.

Unlike the recognition of foreign court rulings that can often remain unrecognized due to the lack of bilateral relations between the two states or lack of reciprocity, the recognition of arbitral awards is characterized by simplicity, owing to adoption of one of the most successful treaties known in international law – the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, concluded more than half a century ago.  This Convention has more than 140 signatories, including Serbia.  Article 3 of the New York Convention provides that “each Contracting Party shall recognize the importance of the arbitral award and authorize the enforcement of that decision in accordance with the rules of procedure applicable in the territory in which the decision is invoked.”

The advantage of arbitral awards in this field, therefore, is not only that they will almost always be recognized, but the scope of the decisions themselves is broadened.   The Netherlands can be taken as an example.  Under Dutch law, a ruling of a foreign court will be recognized, but only rulings of courts of a country with whom the Netherlands has an international treaty.  Since Serbia has not concluded a bilateral treaty with the Netherlands, a ruling issued by a Serbian court would be practically inapplicable in the Netherlands.  This is not the case where recognition of an arbitral award is sought, since the Netherlands is a party to the New York Convention.  As is Austria.  Although Serbia and Austria have close economic, commercial, cultural, political and other ties, Serbia and Austria have not concluded a bilateral treaty on the mutual recognition of court rulings, so any litigation against a person domiciled in Serbia or domiciled in Austria would be in vain because the ruling can not be recognized.

  1. Conclusion

It could be argued that arbitration is superior to court proceedings.  Resolving certain types of disputes is reserved only for the courts, but when arbitration is used to settle disputes, it is based on speed, non-publicity of the procedure, specialization of arbitrators for a particular type of dispute and their expertise, flexibility and efficiency, facilitated recognition and enforcement of the award, and more and more often, parties place their faith in it.  It can be said that the popularity of arbitration is well deserved, and increases if the parties originate from different countries where court proceedings are protracted if the nature of the dispute requires special know-how and expertise on the part of the arbitrators, and if the parties require recognition and enforcement of the award in foreign country.

Authors: Milinko Mijatović and Suzana Dončić