As your business increases in size and its transactions in complexity, the need for ironclad contracts become more pressing and with it, the reliance on commercial arbitrations as a last resort to mitigate counterparty risk. What are arbitrations, and how to best prepare for this agonizing eventuality that some businesses must face? As a starting guide, this article will explain in five steps the key information you should have on hands to obtain the best results for your case.
1. Understand arbitrations
It depends on the country, but usually arbitration is one of the two main legal ways to resolve commercial dispute, the other being court. In most cases, courts are public entities reporting to the Department of Justice while arbitration centers work more like independent agencies. Each side select an arbitrator (usually a practicing lawyer), who then jointly select the final arbitrator to form a three-persons Tribunal. The Tribunal accepts the case (and the arbitration fees) from the Claimant, then notifies the Plaintiff of the former’s Request for Arbitration. Both sides are then asked to submit one or multiple Statements of Defense, the culmination of which is one or multiple Hearings. At each hearing, both parties are given a chance to explain their respective position, and the Tribunal to ascertain their understanding of the case. After the final hearing, the Tribunal discuss internally and issue the verdict, usually as a specific performance. The verdict may be binding (unchallengeable later in court) or not. If the verdict is binding, the winning party may take the verdict to the Enforcement Agency of that country for the verdict to be carried out against the other party.
2. Verify whether you can / should arbitrate
Firstly, did you specify in your contract that in the case of dispute, such-and-such arbitration center will be the applicable authority to rule over the disagreement? If not, there is a high chance that your counter-party will object to the center’s jurisdiction at the first hearing.
Secondly, always keep in mind that your goal is to be compensated for a specific amount, not simply to get a verdict issued or get stuck with assets of little value. Thus the decision to arbitrate should be considered at three nodes:
– Whether you will get a favorable verdict
– Whether the verdict will be carried out favorably by the Enforcement Agency
– Whether the Enforcement Agency can recover enough assets to compensate for the time and money you invested into the process
Another unknown in the equation is whether the arbitration center has the jurisdiction to arbitrate even when both parties agree. A typical trap is to get a favorable verdict at an arbitration center overseas, which is then deemed invalid by the Court or Enforcement Agency of the host country. Another potential problem is that arbitration centers only have authority over commercial transactions. Transactions between a company and an individual for example, may not fall into arbitrational jurisdiction.
3. Know the arbitrators
As the Tribunal has three members, having two aligned to your cause is the key to your success. As you are entitled to pick one arbitrator, be sure to consider all factors that would help your case. Age, experience, English level (if the case is in English) familiarity with the industry / field, are all important factors. Partiality is another problem which can completely change the meta game. If the arbitrator(s) accept money from the other side and you are unwilling to match the bids, be prepared for a painful hearing session as there is a lot that can be done within the realm of the law / logic that will completely turn that nicely packed file of yours into pile of useless papers.
Keep in mind also that arbitration decisions are private and irreversible in most cases.
4. Motivate your lawyers
Your law firm is on your side but that doesn’t necessarily mean they are doing their best. Each lawyer may be working on several cases at once and their concentration and dedication levels may falter at times. A performance-based compensation system will help align their interests and yours. At the same time, you should always try to put a fee cap as your costs would almost certainly explode otherwise.
It is the job of your lawyers to consider the strengths and weaknesses of your position and prepare defenses for all possible attacks. However, some lawyers may inhibit self-confidence bias in which they believe their arguments are foolproof. Furthermore, the other party may probe in the strangest of places: citing procedures that were followed incorrectly or non-collaborative behaviors on your part that exhibit “bad faith.” Challenge your lawyers, ask annoying questions and consider the impossible to help your lawyers be on their highest alert level.
5. Have Plan B
In the case where the arbitration is going awry, be prepared to sit together with the other party for private negotiations. If both parties can reach an agreement then the arbitrational procedure may be stopped before a verdict is reached. Furthermore, you may be able to get the Court to overrule the arbitration decision if along the way there was an incorrect procedure. Your side was not represented correctly and only you knew it? That’s a great card to have should the tables turn.
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