Entrepreneurs – consider arbitration for dispute resolution

If you are in dispute with one of the companies or suppliers with which you work, have you considered trying to settle the situation via arbitration? This is an alternative which can help you avoid traditional legal proceedings in the courts. This is how it works.

Elisa is a Luxembourg merchant. For several months now she has been in dispute with her German vendor who has several overdue invoices. Elisa would like to find a rapid solution, discreetly and without the need to initiate long and costly legal proceedings. In her situation, seeking arbitration could be an efficient solution. What is this and how should she go about it?

What is arbitration?

Arbitration is an alternative to traditional legal proceedings for dispute resolution. The parties involved in the dispute choose, by mutual agreement, one or three independent and impartial arbitrators. These constitute an arbitral tribunal responsible for settling the disagreement. At the end of the process, a final decision referred to as an “award” is given by the arbitrators.

There are two types of arbitration:

• • Institutional arbitration: administered by an arbitration institution such as the Luxembourg Arbitration Center of the Chambre de Commerce, which ensures that proceedings are carried out properly in accordance with predefined arbitration rules.
  • Ad hoc arbitration: administered by the involved parties without the assistance of an institution.

Arbitration can be considered as a private form of justice, which runs in parallel with and is complementary to state justice. It means conflicts can be settled without the need for traditional court proceedings.

N.B.: arbitration is only possible if all parties give their agreement. This can either be done:

• • prior to the dispute arising (in anticipation of any potential conflicts), by inserting an arbitration clause into the business contract or agreement; or
  • after the dispute has arisen, by signing an arbitration agreement.

This type of dispute resolution procedure is particularly recommended when the dispute has an international dimension, if large amounts are at stake or when specific technical knowledge is required.

In which situations can you use arbitration?

Arbitration is particularly suited to disputes between professionals (companies, suppliers, service providers, etc.) requiring a rapid solution or a certain degree of confidentiality. Arbitration cannot be used for disputes between professionals and consumers, between employers and employees, or for residential lease agreements. Elisa could not therefore use this process if she were in dispute with a client or one of her employees.

The disagreements handled are generally linked to commercial, civil or financial transactions. For example, these may relate to the payment of an invoice, the delivery date for goods, product compliance, service quality or the repayment of a loan, etc. Sales and service agreements, shareholder agreements and corporate articles of association may include an arbitration clause in anticipation of any potential disputes.

This type of dispute resolution procedure is also particularly recommended when the dispute has an international dimension, if large amounts are at stake or when specific technical knowledge is required.

What are the pros and cons of arbitration?

Arbitration offers a number of advantages versus traditional legal proceedings, which are often long and costly as a result of the many appeals that are possible.

• • It is a flexible procedure: the parties can, by mutual agreement, determine the place of arbitration, the applicable law for their business, agree the rules of the proceedings and choose the language for discussions. For example, Elisa and her supplier may decide to handle proceedings in German rather than in French.
  • Arbitrators are professionals: there may be one or three arbitrators. In the latter case, each party names one arbitrator and these two choose a third. Together they constitute the arbitral tribunal. Arbitrators may be legal experts or lawyers, or persons chosen for their technical skills or expertise in the field considered. The arbitral tribunal may be designated by the parties or by the arbitration institution.
  • The costs are transparent: for institutional arbitration, the arbitration costs are generally known at the start of proceedings. They include the fees and costs of the arbitrators and lawyers, any costs for experts and witnesses, and the administrative costs of the LAC (where applicable).
  • Proceedings are confidential: hearings are not public and arbitration awards are not published, in order to preserve business secrecy and the confidentiality of proceedings.
  • The procedure goes quickly: in principle, the arbitral tribunal is given a deadline for its decision. By way of example, as part of an arbitration case administered by the LAC, simplified proceedings take around six months, and the award for emergency proceedings may be given within 15 days.
  • The decision is final: there is no appeals procedure and there is limited right to recourse against an arbitration award. Furthermore, the award is enforceable internationally under the New York Arbitration Convention of 10 June 1958. Arbitration awards are recognised and enforceable in 170 countries across the world under this Convention.

Useful info: if the losing party refuses to honour the award, it is possible to refer to a country judge to deliver an enforcement order obliging the losing party to honour the decision.

The arbitral tribunal may decide to condemn the losing party to cover all of the arbitration costs, including those of their adversary.

Despite the many opportunities it offers, there are also limits to arbitration.

• • Not all conflicts can be taken to arbitration: this is specifically the case for matters related to consumer law, criminal law, employment law and rental lease agreements.
  • Appeals and the right to recourse are limited: cancellation is the only recourse possible, solely in situations determined by law (e.g. if the arbitral tribunal was not properly constituted, declared incompetent, etc.)
  • There is little legal precedent.
  • Some decisions cannot be taken by the arbitral tribunal: the arbitral tribunal cannot order attachments or pledges.
  • Costs must be paid upfront: the administrative costs and arbitrators’ fees must be paid at the start of proceedings.

Useful info: the arbitral tribunal may decide to condemn the losing party to cover all of the arbitration costs, including those of their adversary.

Arbitration appears to be an interesting alternative for solving Elisa’s dispute. She decides to get in touch with the LAC and to find out how to proceed with setting up an arbitration agreement with her supplier. She also intends to revise her agreements for the future, with the inclusion of an arbitration clause in anticipation of any potential disputes.

More information on the Practical Guide – Arbitration and from the Chamber of Commerce.