Arbitration in Contracts
Today, interactions in society are frequently structured through various contracts in economic, political, social, and other fields. In general, contracts obligate parties to comply with specific terms, to perform certain acts, or to refrain from certain acts. At times, a contractual obligor may intentionally or unintentionally fail to perform its obligations, thereby giving rise to a dispute. Such disputes may be resolved through different mechanisms. One common approach is to refer the matter to the appropriate judicial authority and to file a lawsuit. However, due to the high costs of litigation and the large volume of cases before the courts, this route often requires a lengthy period.
Arbitration Proceedings and Issuance of an Award
Conditions for Referring Contractual Disputes to Arbitration
For the reasons noted above, parties sometimes choose an alternative dispute resolution method due to time loss, protracted proceedings, and the high costs of litigation and expert assessments. This method, known as arbitration, is widely used in developed jurisdictions.
Arbitration means entrusting the resolution of a dispute and the decision-making process to an impartial person to determine which party is entitled and which is not. That impartial person is the arbitrator, who may be a natural person or a legal entity. In practice, parties may select an arbitrator and expressly provide for that selection in the contract, or they may designate an institution or company as the arbitrator.
Advantages of Referring Disputes to Arbitration
Key advantages of arbitration in contracts include the following:
- Compared to court litigation, arbitration is generally less costly.
- There is no strict requirement to follow administrative formalities and civil procedure rules in the same manner as court proceedings.
- Communication and engagement between the parties and the arbitrator or arbitral tribunal is often more effective.
- Arbitration helps prevent unnecessary delay and may enable arbitrators to address the dispute more efficiently.
Which Disputes Can Be Referred to Contractual Arbitration?
Certain disputes cannot be referred to arbitration. These exceptions are stated in Article 478 of the Civil Procedure Code. For example, disputes relating to bankruptcy, marriage and annulment of marriage, divorce, and lineage are not arbitrable. Criminal matters are also outside the scope of arbitration and must be handled by courts.
A key issue in any referral to arbitration is selecting arbitrators with sufficient knowledge of the applicable arbitration rules and requirements. Otherwise, arbitration may become even longer and more expensive than court proceedings. Accordingly, it is recommended that disputes be referred to experienced legal professionals or to institutional arbitration centers, and that parties avoid appointing individuals who lack adequate familiarity with arbitration regulations.
Voluntary and Mandatory Arbitration
Arbitration may be either voluntary or mandatory. Arbitration in contracts is generally voluntary. In voluntary arbitration, parties may, at the time of entering into the contract, include a clause stating that any potential disputes will be referred to arbitration for resolution. Arbitration may also be agreed in a separate arbitration agreement.
In either case, it is essential to specify matters such as the scope of disputes to be submitted to arbitration, the identity and details of the arbitrator or arbitrators to avoid ambiguity, and the number of arbitrators when more than one is intended.
In some situations, the parties may, through an arbitration agreement or a separate contract, appoint a person to select the arbitrator on their behalf. That person may be a natural person or a legal entity. The third party responsible for appointing the arbitrator must comply with all conditions set out by the parties in the arbitration agreement.
Who Cannot Be Appointed as an Arbitrator?
The following persons may be appointed as arbitrators only if both parties expressly agree:
- Individuals under the age of twenty-five.
- Persons who have an interest in the dispute.
- Persons who have a relationship by blood or marriage with one of the parties.
- Persons who, or whose spouses, are heirs of one of the parties.
- Persons who serve as guarantor, guardian, attorney, or agent managing the affairs of one of the parties.
- Government employees within the scope of their official duties.
The individuals listed above are not eligible for appointment as arbitrators unless both parties consent.
Frequently Asked Questions About Arbitration in Contracts
Arbitration is a method for resolving contractual disputes in which the parties refer the dispute to an impartial arbitrator or arbitral tribunal to determine the rightful party. Its advantages commonly include lower cost, reduced delay, and improved engagement with the decision-maker.
Certain matters, including bankruptcy, marriage and annulment of marriage, divorce, lineage, and criminal matters, are not arbitrable and must be addressed by courts.
Voluntary arbitration is agreed upon by the parties, typically in the contract or in a separate arbitration agreement, to resolve disputes through arbitration. Mandatory arbitration is imposed by law for specific matters. In contractual practice, arbitration is usually voluntary.
Individuals under twenty-five, persons with an interest in the dispute, close relatives by blood or marriage, certain heirs, agents or attorneys managing a party’s affairs, and relevant government employees cannot serve as arbitrators unless both parties consent.
It is advisable to select experienced arbitrators with a solid understanding of arbitration rules. Parties may also choose institutional arbitration centers to reduce the risk of delay and high cost.
Yes. The parties may appoint a third party, whether an individual or an entity, to resolve the dispute, and they may also authorize a third party to appoint the arbitrator, provided that the appointment follows the arbitration agreement. What is arbitration in contracts, and what are its advantages?
Which disputes cannot be referred to arbitration?
What is the difference between voluntary and mandatory arbitration?
Who cannot be selected as an arbitrator?
How should an appropriate arbitrator be selected for a contract?
Can arbitrators or appointing authorities be third-party individuals or entities?
