Arbitration: an interesting alternative for your company

Parties in international trade often make use of arbitration to settle their disputes. But what exactly is arbitration? And could this perhaps also be an interesting tool for your company?

What is arbitration?

Arbitration is an alternative means of dispute settlement. Where normally a dispute would ultimately end up in court, it is possible for parties to opt for arbitration instead.

In arbitration, parties have more freedom to tailor the proceedings themselves. For example: if you have a Chinese counterparty, it is very well possible that both of you do not want to settle any possible dispute before the national court of the other party. In that case, arbitration can be a good alternative, as parties can agree on a neutral place to settle their dispute, such as Switzerland or Singapore. Parties can further agree that the proceedings will be conducted in the English language, making it possible for both parties to fully understand the proceedings.

Because of these various possibilities, arbitration is an often-used tool in international trade. Furthermore, an arbitral award is just as ‘valid’ as a court judgment. Under certain circumstances, an arbitral award will even be of more value (see further below under ‘What are the advantages of arbitration?’).

How can you choose arbitration?

When a dispute arises with another party, it is not possible to one-sidedly decide to start up arbitration proceedings. An arbitration can only be commenced when parties explicitly agreed to arbitration in the form of an arbitration agreement. Usually, such arbitration agreement concerns a separate clause in the commercial agreement that parties entered into together. When something goes wrong in the execution of such agreement, an arbitration can be started.

However, it is also possible for parties to agree to arbitration after a dispute between them arose. It is important that parties conclude a separate and signed agreement to this end.

What are the advantages of arbitration?

Arbitration can have multiple advantages:

• Confidentiality. Your company may not wish its lawsuit to be widely displayed within the media, or that competitors can follow a certain dispute in the court room. With most arbitral institutions, arbitrations are strictly confidential (and if not, such confidentiality can be agreed upon between the parties). This means that often it is not even known to the outside world that parties have a dispute with each other;
• Procedural freedom. Parties can (whether or not in conjunction with the arbitral tribunal) tailor their own procedure. Parties can agree on the place of proceedings, the amount of arbitrators (one or three), the applicable law, the language of the proceedings, how many submissions should be exchanged, whether witnesses should be heard, whether the hearing should be organised online, etc.;
• Expertise of the tribunal. Parties can also influence the choice of arbitrator (or directly appoint arbitrators themselves). Does the dispute concern a technical issue? Then it would for example be possible to appoint one technician with a lot of knowledge of the specific industry next to two legal professionals;
• ‘Get paid’. Especially when your counterparty is located outside of the European Union, it can be difficult to actually get paid after you received a positive court judgment. In countries such as China, a Dutch court judgment is generally of no concern, since such judgment will not be recognized and can therefore not be enforced. This is different for an arbitral award. Because of the New York Convention 1958, to which a lot of important trade partners such as China, the United States, India, etc. are a party, it is much easier to enforce an arbitral award in third countries than to enforce a national court judgment;
• Speed. In most occasions, arbitration does not offer the possibility of an appeal. This means that a long-lasting conflict can come to an end sooner;
• Recovery of procedural costs. In arbitration, it is possible to recover your entire procedural costs (meaning: also the attorney’s fees actually spent based on the invoices submitted). In court proceedings in the Netherlands, only a fraction of these costs can actually be recovered in case of a positive judgment. Note: the procedural costs can only be recovered in arbitration if you win the proceedings (for the most part). Therefore, if you lose, it is also possible that you need to compensate your counterparty’s costs.

Are there certain institutions where you can commence arbitration proceedings?

Yes, there are numerous arbitral institutions where you can commence arbitration proceedings. These institutions usually have their own arbitration rules concerning the rules of procedure. The arbitration agreement normally provides which institution the parties choose to administer their dispute.

In the Netherlands, several arbitral institutions exist where you can start up an arbitration, of which the Netherlands Arbitration Institute (NAI) is the largest. Apart from that, there are numerous institutions that focus on specific industries, such as UNUM which mainly focuses on the transport sector. There are also some larger, international institutions, of which the ICC International Court of Arbitration is by far the best known.

On a sidenote, it is also possible to agree on an ‘ad hoc arbitration’. The arbitration will then not be administered by a certain institution, but will be tailored by the parties themselves (and the arbitrators to be appointed by them).

Who are the arbitrators?

Parties can agree whether they want to have one or three arbitrators to handle their case. If parties did not come to any agreement on this, the arbitral institution can decide on this matter as well. It often happens that parties agree that each of them appoints one arbitrator, after which these two party-appointed arbitrators appoint the third arbitrator (the chair of the tribunal). Furthermore, it is possible for the arbitral institution to provide a list with several names, where parties can anonymously indicate their personal preferences after which the institution can proceed with the appointment.

The role of ‘arbitrator’ is not a ‘regulated profession’ such as for example a judge or an attorney. This means that, in principle, anyone could be appointed as arbitrator. In practice however, usually experienced attorneys or (former) judges are appointed and are included on the arbitrators’ lists of the arbitral institutions. Further, experts (such as technicians) in a certain field or industry also regularly act as arbitrator. Parties can also demand certain competencies from arbitrators (for example: demonstrable knowledge of Dutch civil law).

Do you need a lawyer in arbitration?

Representation by a lawyer in arbitration is not required. However, in practice, parties are represented by a lawyer in almost every arbitration. We would certainly recommend engaging a lawyer in arbitration to tailor the proceedings and to bring forward the right arguments (especially since an appeal is usually not possible).

What are the costs?

The costs of arbitration depend on several factors, which also means it is possible for the parties to influence these costs to a certain extent: the number of arbitrators, the arbitral institution that will administer the arbitration, the claim amount in dispute, the required amount of procedural steps, etc. In general, it can be said that an arbitration can be more expensive than normal court proceedings. However, this may be different when a court case goes to appeal, or when the winning party in arbitration can recover all of its costs.