Arbitration in international commercial relations

Entrepreneur, especially one operating in international market, should be aware of the opportunities and risks associated with  negotiation and conclusion of an arbitration agreement. Content of a seemly inconspicuous arbitration clause may often influence - or even determine - the outcome of a dispute. This is what makes knowledge of the possible practical consequences of implementing arbitration clause in the contract so crucial for entities functioning on international markets. 

This  article aims to provide the reader with knowledge of basic aspects of commercial arbitration in its international dimension. Some references are made to current Polish regulations, however the principles standing behind the laws quoted are quite uniform in most civil law systems.

1. Duration of the proceedings. Proceedings before courts may last for years and parties to the dispute have a limited impact on the time spent in court. For example, average duration of a case brought in front of  a (Polish) court - from submission of the application to obtaining a judgment - is more than 500 days, and, in disputes which are commercial in nature, even more than 800 days. 

Arbitration proceedings  are shorter, but still  far from perfect - in Poland they are, on average, 352 days long. The general average of EU states is 647 days for the proceedings before the courts and 503 days for arbitration.

One should be aware that the parties entering the arbitration agreement may determine in advance the maximum time by which the tribunal's decision should be made. Moreover, some arbitration rules may pre-set a specific deadline binding the arbitrators, for example, up six to months (as it is the case of the art. 30 of ICC Arbitration Rules).

2. Flexibility of contractual determination of the rules governing the proceedings. Litigation in civil law systems is quite formalized (which is quite an understatement!). The result is that the court's final judgement may at times be unrelated to the reality of the case (for example - according to Polish regulations, if a party does not provide all the relevant evidence as promptly, it may be deprived of being able to present it later on during the proceedings and, thus, loose the case on lack of evidence only).

Arbitration, on the other hand, does not impose stringent formalities on the parties. Moreover, the parties themselves can decide most of the rules governing the proceedings. For example - they may specify that the Court shall be guided by the principles of fairness, be ruling ex aequo et bono or operate otherwise taylored-to-the case set of rules. 

An interesting option is arbitration directed by the principles of amicable compositeur, where the role of the Tribunal is not not only to settle the dispute, but also lead to such a conclusion, which would keep the business relationship between the parties as unharmed as possible, taking into conideration the circumstances of the case.

3. Confidentiality. Proceedings before the courts of law are, in general, open to the public. This may be changed, f.e.  for the protection of trade secrets, but the final judgment, at least in Poland, always has to be announced publicly. Arbitration proceedings are held behind closed doors, and the publication of the decision is entirely at the discretion of the parties. This feature of arbitration may be important in cases where the business is dependent on keeping the occurrence of the dispute a secret. Some arbitration rules (f.e. Rules of the Court of Arbitration at the Polish Chamber of Commerce in Article 12) imposes an obligation of confidentiality not only on the arbitrators, but also on the parties.

4. Forum selection. Settlement of commercial disputes, particularly those international in nature, many times requires not only a very extensive knowledge of  law, but also an expertise covering many specialized fields and ability to communicate in foreign languages ​​to a degree that may be beyond the reach of the ordinary courts.  Lack of such knowledge may translate directly to the quality of the court's decision. In arbitration this problem is solved to a great extent, as leading arbitration centers maintain lists of arbitrators consisting of experienced professionals of many fields of life. 

5. Choice of law, language, and place of the proceedings. This feature is particularly important in international relations. If there is a dispute between natural persons or companies established in different countries whose representatives speak different languages, one of the parties may be handicapped in defending its rights. Arbitration Agreement, properly negotiated, allows the parties to taylor a "neutral ground" for future disputes. This includes, but is not limited to, choice of the place and  language in which the proceedings are to be conducted.

6. Lack of appeal. Proceedings before the courts of law usualy grant a dissatisfied party a right to appeal from the decision of the court of first instance and the appeal  may be based on a wide spectrum of grounds. Arbitration proceedings - on the other hand - give a very limited opportunity to appeal from the award.

7. The costs. It is often stated that the cost of  arbitration  is usually lower than this incurred by litigation. As it turns out in - this is not always the case. For example, research carried out by the Roman ADR Center shows that the average cost of arbitration with a dispute value of EUR 200 000 in the EU is 34 385 euros. In  case of proceedings before the courts, the average is 25 357 euro. However, one should keep in mind that this is a calculation of the costs associated strictly with the administration and legal services. The estimation does not address many issues like, for example the costs of rising interests. Current statutory interest rate in Poland is 13% per annum. Given the 200 000 euro dispute value this rate would translate into an additional 2 000 euro for each month of the proceedings.  

8. Summary. Regular part of conducting a business is contracting and negotiating. Knowledge of the consequences of specific provisions of the various clauses allows one to properly evaluate the situation and defend the parties' interests effectively. As proven above, arbitration clause is an element worth considering while drafting an agreement an, by itself gives a vivid space for negotiation.

Michael Hubicki