Commercial relations, by their very nature dynamic and complex, can unfortunately generate disagreements. When a dispute arises, the prospect of lengthy, costly and public legal proceedings before the state courts can seem daunting, even detrimental to the smooth running of the business. The frequent backlog of cases in the courts does not help matters, with delays that are sometimes incompatible with the pace of business. Fortunately, there is another way, often unknown to the uninitiated: commercial arbitration. This form of private justice, chosen by the parties, offers a different framework for settling disputes. The aim of this article is to give you a better understanding of this mechanism: what exactly is arbitration, what are its main advantages and limitations compared with the traditional courts, and in what situations could it represent a relevant solution for your company?
What exactly is commercial arbitration?
Imagine being able to choose the "judges" who will settle your commercial dispute, based on their expertise in your business sector. In essence, this is what arbitration allows. Arbitration is an institution in which the parties decide, by mutual agreement, to remove their dispute from the jurisdiction of the State and to entrust it to one or more private individuals, the arbitrators, whom they invest with the task of judging. Far from being an unregulated form of parallel justice, arbitration in France is governed mainly by the provisions of Book IV of the Code of Civil Procedure, in particular Articles 1442 et seq.
The fundamental difference with state justice lies in its contractual origin: without an agreement between the parties, there can be no arbitration. This agreement may take the form of a clause inserted into a contract even before a dispute arises (the arbitration clause) or an agreement signed once the dispute has arisen (the compromise). This private nature gives rise to a number of distinctive features: the possibility of choosing one's judges, the potential confidentiality of the debates and the decision (the award), and greater flexibility in the organisation of the procedure.
Tailor-made or off-the-shelf arbitration: ad hoc vs. institutional
When you opt for arbitrage, there are two main ways of organising your business. You could compare them to building a house: do you prefer to draw up the plans and manage everything yourself, or go through a developer who offers you a framework and services?
Arbitration ad hoc is the "tailor-made" option. The parties themselves define all the rules of procedure: how the arbitrators will be appointed, where the arbitration will take place, what language will be used, what timetable to follow, etc. This formula offers maximum flexibility and total control to the parties. However, it requires meticulous organisation and unfailing cooperation between the parties. The slightest disagreement over a procedural modality can lead to blockages and delays. Particular care must be taken when drafting the initial arbitration agreement to anticipate these difficulties, which often requires the assistance of competent counsel.
Conversely, arbitration institutional is similar to "ready-made" arbitration. The parties entrust the organisation of their arbitration to a permanent body, an arbitration centre. There are well-known international arbitration centres (such as the ICC International Court of Arbitration) and national centres (Association Française d'Arbitrage - AFA, Centre de Médiation et d'Arbitrage de Paris - CMAP), as well as numerous regional centres, often attached to Chambers of Commerce and Industry (as in Marseille). These centres offer pre-established arbitration rules detailing all stages of the procedure, from the appointment of the arbitrators to the notification of the award. They also provide administrative support (secretariat) to facilitate the proceedings. This option offers security and predictability. The disadvantage is less flexibility and administrative costs in addition to the arbitrators' fees, although the overall cost is not necessarily higher than a potentially poorly managed ad hoc arbitration. The choice between these two forms will therefore depend on the complexity of the case, the financial stakes involved, the relationship between the parties and their ability to cooperate in organising the process.
Why choose arbitration rather than the courts?
Opting for arbitration can offer a number of significant advantages for a company involved in a commercial dispute.
One of the major attractions is often the confidentiality. Unlike public court hearings and accessible judgements, arbitration proceedings and the resulting award are, under French domestic law, confidential by default, unless the parties decide to waive confidentiality (in accordance with article 1464 of the Code of Civil Procedure). This is a considerable advantage when it comes to protecting sensitive information, business secrets or a company's reputation.
La choice of referees is another decisive advantage. The parties can appoint people with specialised technical or sectoral expertise, who are perfectly familiar with the customs and specific features of their field of activity. This in-depth knowledge can prove invaluable in understanding a complex dispute, where a state judge, even a competent one, might take a more generalist approach.
La flexibility of the procedure is also a strong point. The parties and the arbitrators can adapt the rules governing the conduct of the proceedings to the specific needs of the case, departing from the sometimes rigid formalism of court proceedings. This may involve the timetable, the methods of proof, the place of hearings, etc.
As for the speedAlthough this is often emphasised, it needs to be qualified. While a well-conducted arbitration may indeed result in a decision more quickly than a judicial procedure subject to multiple appeals, this is not an absolute guarantee. The complexity of the case, the availability of the arbitrators and the parties, and any procedural incidents may increase the time taken. The advantage may lie more in the prospect of a decision that is often more definitive, as the avenues of appeal are more limited.
Finally, for companies operating internationally, arbitration offers a significant advantage in terms ofenforcement of sentences abroad. Thanks to the 1958 New York Convention, which has been ratified by a large majority of countries, an arbitration award is generally easier to have recognised and enforced in another country than a state judgment.
What are the drawbacks or points to watch out for?
Despite its attractions, arbitration is not without potential drawbacks that should be considered before committing yourself.
Le cost is often seen as an obstacle. Arbitrators' fees, which are sometimes set on an hourly basis or according to the stakes in the dispute, can be substantial. If you opt for institutional arbitration, there are additional administrative costs. The fees of the lawyers assisting the parties must also be taken into account. While legal proceedings can also prove costly, particularly in the event of successive appeals, the initial cost of arbitration may seem higher, although it must be assessed in the light of the potential overall duration and the stakes involved.
Another important point is the limitation of remedies. In French domestic arbitration, appeals by default are now excluded, unless the parties have expressly provided for it (article 1489 of the Code of Civil Procedure). The main remedy against the award is an action for annulment, but this is only available on limited grounds, relating essentially to serious procedural irregularities or breach of public policy (article 1492 of the Code of Civil Procedure). It is generally not possible to challenge the arbitrators' assessment of the facts or application of the law. This increased finality of the arbitration decision can be seen as an advantage (speed, certainty) but also as a risk if the decision is considered to be ill-founded.
Finally, it should be remembered that arbitration is based on the will of the parties. Arbitration cannot take place without a valid arbitration agreement (arbitration clause or arbitration agreement). If such an agreement does not exist or is contested, the arbitration route may be closed or require prior validation, which may be complex.
When is arbitrage right for your company?
Recourse to arbitration is not a universal solution, but it is particularly appropriate in certain commercial situations:
- Technically complex disputes: When understanding the dispute requires very specific technical, scientific or sectoral expertise (construction, new technologies, finance, energy, etc.), the possibility of choosing arbitrators who are experts in the field is a major advantage.
- Imperative need for confidentiality: For disputes involving trade secrets or strategic know-how, or where publicity could damage the image of the companies concerned.
- International context : In cross-border contracts, arbitration offers a neutral ground, allows the choice of applicable law and language of proceedings, and above all facilitates the enforcement of the decision abroad via the New York Convention.
- Willingness to maintain a commercial relationship: Although it is a dispute resolution process, arbitration can sometimes be perceived as less frontal and destructive than a court battle, potentially allowing commercial links to be maintained once the dispute has been settled.
- Searching for a tailor-made procedure : When the parties themselves wish to define the rules of the procedural game in order to adapt them as closely as possible to the nature of their dispute.
Assessing the appropriateness of arbitration for a given situation requires a detailed analysis of the issues at stake and the specific features of each case. Our firm can support you in this strategic reflection and help you define the best approach for resolving your commercial disputes.
Sources
- Code of Civil Procedure (in particular Book IV, Articles 1442 et seq.)
- New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958
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