Arbitration is an effective tool for resolving business disputes

It is still more and more difficult to obtain justice in the court in Czech Republic. Business disputes, often quite clear, last often several years thanks to obstructions. The businessmen around the world faced similar problems in the past and searched for alternative ways. One of them is the arbitration.


What is arbitration?

Arbitration is a method of out-of-court negotiating and resolving disputes between parties. In our country, this procedure is governed by act no. 216/1994 Col. Arbitration and enforcement of arbitral awards, as amended. Based on this act, the parties can mutually agree that their eventual disputed will not be resolved in a court, but by an independent private entity that is enshrined in the agreement. It is also given by the law that arbitration can resolve virtually any property disputes from various fields of law (exceptions are bankruptcy or enforcement proceedings-related cases). The arbitration of the dispute by the arbiter has basically identical legal effects as a judicial decision, and it is also court-enforceable – an arbitral award – an alternative of a verdict – is a fundament for enforcement.

The basic premise for being able to resolve a dispute in arbitration is a valid arbitration agreement. The agreement can be of two forms – a so-called arbitration clause covers all potential property disputes that can eventually arise in the future between the parties. The agreement on arbitrator is a post-dispute option, focused on particular dispute arisen in the past.

Main advantages: swiftness and lower price

Compared to resolving a business dispute in general court, the arbitration has significant advantages. The main one is its quickness - the arbitral award is usually issued in three months after the arbitration action is submitted. The reason for that is a far lower formality than in court proceedings that hinders the defendant from prolonging by obstructions or avoiding the justice altogether, and the risk of the debtor making his or her property unavailable and the creditor's claim becoming unclaimable is also negated.

The other reason for the described swiftness is a fact that the arbitration is essentially a single-instance solution. The law allows the parties to agree on having the arbitral award reviewed by other arbitrators, but this kind of agreement is not often used in practice – particularly because it would eliminate the advantage of the swiftness. The law also counts with the possibility of a limited court review of the issued arbitral award, but this is possible only because of process reasons, that are clearly listed in the law. This limited court review can therefore never be equaled to appeal as known from the court proceedings, because by appeal, a court verdict can be disputed in a far larger extent.

A significant advantage is also a lower price of the arbitration. The law allows the parties to agree on procedural rules for the proceedings – the most often modification agreed upon is resolving the dispute primarily based on written proofs. Therefore, many of the expensive costs are reduced – oral hearings, travel expenses, attorney expenses etc. Compared to courts, the arbitration is also more fair . The law allows the arbitrator to resolve the dispute not only on the basis of law itself, but also in regard to the principles of justice (if the parties agree on that). The arbitrator considers the real state of things – looking on the contracts and agreements, and taking into account what the parties intended, not what they signed in the end. An important attribute is the non-publicness. The arbitrator is bound by confidentiality that only the parties can release his or her from - or, in extreme cases, a court. There is no risk of media exposing of the case or an undesired leak of sensitive business information.

Arbitration is a legal tool that is known all over the world. Because many companies are international, a need to resolve international disputes by arbitration arose long ago. In order to the arbitral awards being enforceable in other countries than issued, several international conventions were made. The most important was the Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the "New York" Convention, effective in our country even since 1959. It was signed by most of the countries over the world.

Selection of the arbitrator and his or her qualification

As for the arbitration agreement, the parties should pay attention to the arbitrators and the process of their selection. The most often and generally respected approach for the arbitrator selection is delegation of third person for this act. This is the so-called mechanism of appointing authority ("person entitled to appoint an arbitrator"). It is also possible to include the concrete name of the arbitrator n the text of the arbitration agreement, but this way is very much impractical. The dispute may arise years after the relationship governed by the arbitral clause, and the person in question can be no more eligible to perform such function, no more working in the field, or even be no more alive. This might, of course, disrupt the whole process of arbitration and cause complications to the parties.

The requirements for a person in order to function as arbitrator are not given strictly in the law itself – university level education is not required. High-quality arbitration centres (institutions gathering ad hoc arbitrators and offering administrative services to them) however always cooperate with arbitrators with such education. These are either lawyers or experts in other fields like engineering or IT. These experts can assess e.g. product faults etc., therefore it is ensured that the disputes are decided by competent people. If the dispute is decided by senate of three members, the trustworthy arbitration centres usually use the following setup: the members are experts of the field, and the chairman has a lawyer education.

Consumer disputes?

A topic often discussed is resolving disputes arising from consumer agreements by arbitration. The Act does not forbid this. The competences of arbitration can be based in the agreement only and it is everyone's choice, whether he or she decides to resolve the dispute by arbitration and whether or not he or she signs the arbitration agreement. However, it is true that especially in customer dispute cases, some companies intentionally placed arbitration clauses into contracts in such a way that the signing entity would not notice it. This kind of approach is not correct, because delegating the competence to decide mutual disputes to an arbitrator should be a consequence of free-willed agreement of both parties. For the consumers, there is a simple advice – always read the entire text of the agreement thoroughly, avoid any kind of obligations to a company that pursues such practices, and eventually consult an expert. It is sad that this kind of activities of some companies shed bad light on the whole institute of arbitration, arbitration centres and the arbitrators themselves, all of them seeking to find the justice.

The article was written in cooperation with Union for Arbitration and Mediation of the Czech Republic - the first Czech commercial arbitration centre, founded in 2005. The mission of the Union is a creation of a fair business environment, where everyone gets what rightfully belongs to his or her.

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