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When to use arbitration to resolve commercial disputes?

As an entrepreneur, you probably cannot avoid a situation where there is some misunderstanding between you and your business partner that may escalate into a dispute. Whether the reason is a poorly drafted contract or the behavior of a partner who does not respect the contract, it is important to find a quick solution to the whole situation. This can be arbitration, or arbitration proceedings.

řešení obchodního sporu, arbitráž
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Arbitration is a procedure that can provide you with an equivalent result to court proceedings, but often with a number of advantages such as cost savings or flexibility. For many business people, the possibility of greater secrecy over their business affairs is not uninteresting, as arbitrations are not public. They also allow for the prior selection of a specialist in a particular area of law on whom both parties agree. Many traders already bear this possibility in mind in the initial contracts they enter into.

The power of arbitrators to decide property disputes must be given in a written arbitration agreement (which includes electronic form), either in the form of:

  • Arbitration clauses – a clause that is part of the main commercial contract (or the terms and conditions that are part of it). For example, it states that any disputes arising from this contract will be resolved by JUDr. Karel Novotný, Růžová 22, Prague. The course of proceedings and the form of the arbitral award may also be specified. There may be more than one arbitrator, which is recommended in the case of significant transactions. However, the final number is always odd.
  • Arbitration agreement – even if the parties do not foresee the possibility of alternative dispute resolution beforehand, they may choose it when the dispute is on the table. Also in this case, it can be agreed that the dispute will be decided by one or more arbitrators and/or a permanent arbitral tribunal.

If, despite the existence of an arbitration agreement, one of the parties submits the dispute to the general court and the other party objects to the existence of a valid arbitration agreement (no later than concurrently with the first act in the proceedings), the court is obliged to stay the proceedings.

Need help with representation in court or commercial arbitration?

Do you need help with filing a lawsuit or representation in court? Whether the dispute is just beginning or the proceedings are well underway, we can help you with everything. We will conduct a thorough analysis, assess your realistic chances and suggest a course of action. All this within 48 hours of ordering our services.

What disputes cannot be arbitrated?

Disputes of public non-profit institutional health care institutions, disputes arising in connection with insolvency or execution proceedings, or disputes in which it is not possible to reach an amicable settlement on the subject matter of the dispute under the Code of Civil Procedure cannot be arbitrated.

Tip: Even for consumer disputes, arbitration clauses cannot be inserted into contracts. However, even here, out-of-court resolution can be achieved through ADR (Alternative Disputes Resolution), which is the responsibility of the Ministry of Industry and Trade and the relevant institutions (e.g. the Czech Trade Inspection Authority or the Czech Telecommunications Office). We have discussed this issue in more detail in our article.

Arbitrators and Arbitration Courts in the Czech Republic

 The main source of legislation in the Czech Republic is the Arbitration Act and the Arbitral Awards Act. It allows for the possibility of establishing permanent arbitration tribunals in addition to arbitration by individual arbitrators. So far, there are three permanent arbitration courts in the Czech Republic:

  1. The Arbitration Court at the Chamber of Commerce of the Czech Republic and the Agrarian Chamber of the Czech Republic – which is the only permanent arbitration court with general jurisdiction in the Czech Republic.
  2. The Exchange Arbitration Court at the Prague Stock Exchange – decides only disputes arising from transactions with investment instruments.
  3. The Arbitration Court at the Czech-Moravian Commodity Exchange Kladno – arbitrates only disputes arising from transactions concluded on the Czech-Moravian Commodity Exchange Kladno and on the Hradec Králové Mercantile Exchange, or other disputes if the subject matter is commodities traded on these exchanges.

The arbitrator may be a citizen of the Czech Republic who is of age, of good character and fully competent. Just as the law necessarily requires the arbitration agreement to be in writing, so too must the acceptance of an arbitrator be in writing. No one is compelled to accept the office, but if he or she has already done so, he or she may resign only with the consent of the parties to the dispute or for compelling reasons. Similarly to what we know from the courtroom, an arbitrator may be excluded from the hearing if he has any relationship with any of the parties or the matter under consideration and there is reason to doubt his impartiality.

If the arbitrator resigns or is unable to act as arbitrator, the parties may agree on another arbitrator and, failing that, the court may appoint a new arbitrator on the proposal of either party. Similarly, the parties may propose to the court the exclusion of an arbitrator if they have doubts about his or her partiality. Each arbitrator shall be under an obligation of confidentiality with respect to the facts which he or she has learned in connection with the arbitration.

Arbitration procedure

Arbitration proceedings shall be initiated by the statement of claim and shall commence on the date on which the statement of claim reaches the Permanent Court of Arbitration or the arbitrator. The filing of the statement of claim shall have the same legal effect as if an action had been brought before a court.

You can agree with your business partner on the procedure for conducting the proceedings. In the absence of such an agreement, the arbitrators will proceed as they deem most appropriate in the circumstances of the case in order to establish the facts of the case as soon as possible and without unnecessary formalities in order to decide the dispute. In doing so, arbitrators should endeavor to influence the parties during the proceedings towards an amicable settlement of the dispute.

Proceedings before arbitrators are generally oral and always on camera, which is associated with lower costs and speed. In making their decisions, arbitrators are guided by the substantive law applicable to the subject matter of the dispute. However, the parties may instruct them to decide the dispute according to the principles of fairness.

Arbitrators use mainly documentary evidence in the form of contracts, invoices, acknowledgements of debt to establish the facts, unlike in court, they can only question witnesses, experts and the parties themselves on the basis of their voluntary consent. 

The arbitral award

Arbitration proceedings end with the legal standing of the arbitral award, which is enforceable. The award must be approved by a majority of the arbitrators, and be in writing and signed by at least a majority of the arbitrators. The award must be specific and should contain the reasons for the award (unless the parties have agreed that no reasons are required). However, unlike a court decision, it cannot be appealed. However, you can arrange for a review by other arbitrators or, as a party to the dispute, you can bring an action in court to set aside the award within three months of service.

International commercial arbitration

From the media, we know international arbitration as a “popular” way of resolving cross-border disputes. Here, the existence of international treaties that apply to these proceedings or to the resulting awards, such as the New York Convention on the Recognition and Enforcement of Arbitral Awards, which has international validity, is particularly appreciated.

Compared to domestic disputes, international disputes are more likely to be resolved by the use of commercial custom, or adjudication on the basis of equity (i.e., a general understanding of justice).

Arbitration is practically the only way in which disputes between a State and international investors can be resolved, as litigation before national courts would inevitably lead to doubts about their impartiality. The Czech Republic itself faces several arbitration proceedings. According to a table published on the website of the Ministry of Finance, five arbitrations are currently underway, totalling some CZK 58 billion. The most well-known in the media and the most significant arbitration in terms of the amount of performance is the dispute with Diag Human regarding alleged misconduct by the Ministry of Health during the procurement of blood plasma processors and during the arbitration proceedings. Another well-known media case was the arbitration brought by CME against the Czech Republic for failure to protect its investment in TV Nova.

Tip: Price arbitration is a procedure unrelated to the arbitration proceedings described above. In finance, it is a way of doing business that takes advantage of different prices in different markets. A trader buys a commodity in one market and sells it in another market for a profit that can be considered risk-free.

Arbitration is a tool to help traders reach a quick and efficient solution to existing disputes. On the other hand, the flexibility and speed is compensated by the absence of an enforcement apparatus if one of the parties does not accept the decision, and also by the inferior possibility of remedying poor decisions. Even though traders have a final decision in hand, which is equivalent to a court judgment, it may happen that the courts will stop any execution as unjustified. Therefore, many traders continue to prefer the traditional court solution.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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