Arbitration Mini Handbook

Dear Ladies and Gentlemen,
In 2024, we started an arbitration practice at Jabłoński Koźmiński & Partners Law Firm. We aimed to provide clients with solid theoretical knowledge along with aid in choosing the right substantive law, procedural rules, procedure itself, strategy, and, finally, representation in arbitration.
We advise when arbitration is a better choice than regular litigation. We debunk myths about arbitration, including the one concerning its supposedly higher costs.
We want to be treated not only just as clients' lawyers in an arbitration dispute but also as trusted advisors helping at the pre-dispute stage, assisting in analyzing all possible options. We inform you when the dispute should beresolved before a common court.
Arbitration courts are generally treated as the "younger brothers" of state courts. What is interesting is that historically it was the other way around and arbitration is older.
There are multiple reasons why over the years the state judiciary gained primacy and knowledge concerning arbitration began to disappear.
We are providing you with this mini handbook. Our goal is to present various aspects of arbitration that will help you decide on the choice of this way of resulting legal disputes and organize the party's participation in the arbitration proceedings.

PART I.

RECCOMENDATIONS BEFORE ENTERINGIN
TO AN ARBITRATION AGREEMENT

If (1) a dispute has arisen, but (2) you have not previously concluded an arbitration agreement with the other party, and nevertheless, (3) you are considering going to an arbitration court, the “arbitration utility test” may be of help.

There are some advantages of arbitration worth paying attention to. Some of them are not broadly commented. Therefore, if:

• a quick resolution of the dispute is crucial;
• the matter might be complex and should be resolved by experts familiar with its matter;
• confidentiality of the proceedings, without open access by outsiders, is important;
• the party/parties wish to avoid formalism typical to the proceedings before a national court;
• the parties want to be free to decide on the applicable law;
• a business relationship with the partner needs to be maintained;

- when at least one of the conditions above is met, arbitration leverages going to a state court.

Based on a currently applicable arbitration agreement

When an arbitration agreement has been concluded earlier, filing a lawsuit before an arbitration court should be mandatory. Were it to be brought to a national court without an arbitration court, a state court may deny the lawsuit.

What are the costs?

It is thought that arbitration is expensive. This is a bit too simplistic a thesis.
When planning an arbitration, you may consider elements such as:

• selection of the type of arbitration (permanent arbitration court/ ad hoc/ administered arbitration);
• the procedure of resolving the dispute (normal v. accelerated/simplified);
• number of arbitrators hearing the dispute.

The costs of arbitration proceedings can be reduced already at the pre-dispute stage. Additionally, permanent arbitration courts usually have tools allowing them to calculate the amount of fees that the plaintiff will incur.

An important note!

The misconception that arbitration costs are higher is common because of failing to consider the following factors:

• costs of remuneration of attorneys in connection with a much longer dispute before a national court;
• the possibility of agreeing on a fixed (lower) fee in ad hoc arbitration than in proceedings before a national court;
• completely unmeasurable costs arising in connection with a much longer dispute in a national court (for example, the longer it takes, the higher interest accrues in disputes over monetary benefits);
• the possibility for arbitrators to award the costs of the proceedings to the party winning the dispute.

PART II.

SELECTION OF THE TYPE OF ARBITRATION

AND ARBITRATOR

The choice of the type of arbitration

When deciding on arbitration, the parties determine its type. In practice there might be arbitration: (1) before a permanent arbitration court, (2) ad hoc, or (3) administered.

Permanent courts of arbitration usually hear “bigger cases,” including international ones. They are also highly esteemed. They have their infrastructure and maintain lists of recommended arbitrators that the parties may choose. Crucially, they have their own procedural rules because the parties usually do not want to conduct a dispute based on a formalized procedure under national law. The permanent court of arbitration also proceeds according to its own internal rules when the parties do not choose such rules. These institutions often publish their judgments, which affects the stability of their line of case law. They often also have their calculators, making it possible to estimate the basic costs of the dispute.

Ad hoc arbitration is the examination of a given case or specific cases outside the structures of permanent arbitration courts. This is the most flexible form of arbitration; however, it does not mean that it is the most comfortable one for the parties. It is a notorious practice to apply the rules of permanent arbitration courts in ad hoc arbitration. What can be chosen is, for example, the remuneration of arbitrators which can be determined on a lump sum basis.

Administered arbitration constitutes a “bridge” between the choice of ad hoc arbitration or a permanent court of arbitration. With the consent of a permanent institution, for a fee, the dispute may be resolved on an ad hoc basis using the infrastructure of the permanent institution. The possibility of using the rules of a permanent arbitration court is usually excluded. This is the least chosen type of arbitration.

Selection of an arbitrator

Arbitrators play the same role as judges in national courts—they issue an authoritative decision—a judgment. Arbitration proceedings may also end in another way (such as discontinuation).

The autonomy of the will of the parties is manifested by, for example, the nomination of arbitrators to resolve the dispute. It is both the plaintiff’s and the defendant’s fundamental right. The choice of the type of arbitration in the clause determines the scope of parties’ freedom to nominate arbitrators. The parties can specify the number of arbitrators, their qualifications, the language the arbitrator uses, and in some cultures even… the arbitrator’s sex. An important role is played by the lists of recommended arbitrators kept by permanent arbitration courts. They are helpful when the parties have problems concerning the choice of an arbitrator or are not sure of their professional achievements or qualifications. Nevertheless, the lists are not binding to the parties, they can choose an arbitration not indicated in the list, even if the dispute is resolved by a permanent institution.

A dispute is usually resolved by one arbitrator (sole arbitrator) or by a three-person panel (called a “bench“ or a “tribunal”). The rule is that the disputes are resolved by an odd number of arbitrators. In ad hoc arbitration, a problem arises with the sole arbitrator when the parties do not agree on the person’s selection or when one refuses to accept the nomination. The internal rules of permanent arbitration courts specify the procedures helping to resolve it. However, regardless of the type of arbitration, more often, the parties nominate their arbitrators (side arbitrators), and they then choose the presiding arbitrator. The internal rules of the arbitration institutions precisely specify the procedure in the event of (1) a failure by the parties to select side arbitrators, (2) an election of the presiding arbitrator, (3) an alternative nomination to replace an arbitrator that resigns, is excluded, or is unable to accept or perform his function.

The number of arbitrators affects the costs of arbitration because they serve for a fee. National legal systems determine who can be an arbitrator. Mostly, anyone having a full capacity for legal acts can be an arbitrator. The arbitrator does not have to be a lawyer (therefore, often engineers are present in tribunals resolving construction disputes).

Regardless of the qualifications of arbitrators, the New York Convention, the Geneva Convention, as well as the soft law of arbitration (e.g. the UNCITRAL Rules, IBA Guidelines on Conflicts of Interest in International Arbitration) stipulate that they should be impartial and independent. Violation of any of these requirements should result in the exclusion of the arbitrator in each jurisdiction and lead to a so-called alternative nomination.

Nominating a friend as an arbitrator is not an excluded option, however, it can raise suspicions concerning his impartiality or independence. It is worth nominating arbitrators who are professionally familiar with the matter of the dispute. Another good practice is to check the future arbitrator’s time disposition (permanent courts of arbitration can help in this regard). One can also check the international rankings which consider the most prominent arbitrators in each jurisdiction.

PART III.

CHOICE OF SUBSTANTIVE LAW
AND PROCEDURAL RULES

The scope of the parties’ discretion

Unlike a state court, an arbitration court is generally not bound by (1) substantive law or (2) procedural rules in force in each country. Together, they constitute the “rules of the game” in every arbitration: institutional (permanent), ad hoc, or administered. It is worth being proactive by specifying them in the arbitration agreement (clause) or at a later stage.

There is a general hierarchy of applying the “rules of the game”:

1. the mutual will of the parties is crucial;
2. the lack of consensus means that the arbitrators determine “the rules of the game”;
3. nevertheless, even considerable freedom of choice for the parties or arbitrators is not unlimited.

 Applicable substantive law

The substantive law determines the existence of a claim.

First, arbitrators should apply the law chosen by the parties. Therefore, the activity of the parties in this regard is crucial. The choice of substantive law is particularly important in cross-border arbitrations (foreign law is often the one chosen).

Second, the parties may expressly request that the dispute be resolved not according to the statutory norm of substantive law, but according to the principles of equity and general principles of law. The tribunal may consider, for example, good faith or established customs.

Third, if a choice of law (even due to the lack of consent of the parties) is not made, the arbitrators apply the law applicable to a given legal relationship. It may also be foreign law, defined according to the principles set out in national law regulating cross-border relations.

Fourth, what is more important than the choice of applicable law is the determination of the place where the arbitration award is to be issued. This must be specified in the arbitration agreement (by the parties) or in the award itself (by the arbitrators). An award may be issued abroad, even if the dispute is subject to Polish law because the parties can determine the place of proceedings.

Fifth, even if the substantive law is chosen, the arbitrators are not unconditionally obliged to comply with it. They, however, should apply the provisions included in the canon of so-called basic principles of the legal order. These principles are defined by the doctrine and case law of a given legal order. Substantive law, therefore, constitutes a systematic guide for arbitrators as to what provisions to apply in each case.

“The less substantive law, the greater the discretion of the arbitrators,” especially when the arbitrators rule according to the principle of equity.

Some practical remarks

1. the choice of substantive law should be carefully considered, without forgetting the place (country) of issuing the arbitration award;
2. a decision based on the principle of equity means there is practically zero chance to challenge the arbitrators’ judgment in the national court. On the other hand, it is easier to recognize or enforce such judgment;
3. passivity of the parties in choosing substantive law = delegating its choice to arbitrators;
4. one should remember the so-called conflict rules, i.e. the principles followed by arbitrators when deciding on the choice of a given substantive law, especially foreign law;
5. arbitrators may not want to resolve a case under foreign law, especially when they are unfamiliar with a specific legal order.

Rules of Conduct

Unlike substantive law, the procedural rules before an arbitration court determine how the dispute is resolved.

First, arbitration is not a dispute (litigation) before a state court. Although the parties may agree to apply the rules of a procedural act (e.g. the Polish Code of Civil Procedure), this is not practiced.

Second, one should remember to specify the number of instances. The lack of agreements in this regard means that in practice the arbitration will be a single-instance one.

Third, a failure to specify the rules of the dispute means the obligation to apply statutory regulations (in ad hoc or administered arbitration) or the internal rules of a permanent arbitration court (in institutional arbitration). In each case, however, national provisions regulating the basic principles of the procedural legal order should be applied (such as the principle of equality between the parties).

Fourth, a breach by arbitrators of the procedural rules agreed by the parties is more important than a breach of substantive law. If a judgment violates the “basic principles of conduct defined by the parties,” it may be challenged (for example, by filing a complaint to have it overturned). Its recognition or enforceability may also be refused.

The reduced formalism of the arbitration proceedings compared to standard litigation before a common court should be considered.

Practical remarks

1. One should forget about customs and institutions based on the statutory procedural law. Among other things, attorneys do not appear in gowns, hearings are held sitting down, and the announcement of the judgment does not take place at the hearing;
2. as in the case of the choice of substantive law, it is worth defining the rules of procedure before the arbitration court;
3. the arbitrator’s award cannot be questioned by invoking a violation of the rules of procedure at the stage preceding the award’s issuance; the award must violate these rules;
4. even the less formalized form of dispute resolution present in arbitration does not guarantee proper proceedings in it.

PART IV.

RESOLUTION OF THE ARBITRATION DISPUTE

Legal nature of the dispute before the arbitration court

Arbitration, as well as a proceeding before a state court, is intended to resolve the dispute authoritatively. The court’s judgment is crucial; however, it is also possible to reach a settlement before an arbitration court.

Despite being less formalized, the arbitration court is still contentious in its nature. The tribunal conducts evidentiary proceedings, including hearing witnesses/parties, and granting collaterals (often with the participation of a state court). The tribunal may also seek expert opinion. Arbitration has long-known procedural features such as remote hearings and written statements of witnesses.

Arbitration differs from mediation, in which the parties strive to reach a compromise. It is possible to “switch” from arbitration to mediation (in the so-called “arb-med” model).

Possible outcomes

A proceeding before an arbitration court may end in several ways:

1. a substantive decision (judgment);
2. a procedural decision (e.g. a decision to discontinue the proceeding due to, among others, the expiration of the arbitration clause, withdrawal of a lawsuit, conclusion of a settlement, etc.);
3. a settlement which then will be given in the form of an arbitration award (what results in giving it the status of such an award, being not an “ordinary settlement”).

Practical remarks

It is worth familiarizing oneself with the provisions of national law governing how to end a dispute in arbitration. The freedom of parties is undoubtedly fundamental, however, neither the parties nor the arbitrators may violate the mandatory provision. Permanent arbitration courts ensure that their regulations (shaping the procedural rules in a less formalistic manner than national procedural regulations do) remain consistent with the statutory iuris cogentis.

If, for procedural reasons, the arbitration ends before an award is issued, the following scenarios, generally resulting from the provisions of national law, are possible:

• the arbitration is completed; it is unacceptable to resolve the same subject matter of the dispute between the same parties in the same arbitration;
• the arbitration proceeding ends and the case automatically goes to a national court for resolution;
• the arbitration proceeding is completed, but an identical claim may be brought before the arbitral tribunal based on the same arbitration clause (arbitration agreement).

The issuance of an award by arbitrators or the conclusion of a settlement before them may lead to:

• voluntary execution of the judgment/settlement by the losing party (in whole or in part regarding the claim pursued by the opponent);
• compulsory enforcement of a claim that has been recognized by arbitrators in an award or settlement.

Proceedings after issuing a judgment or a concluded settlement

The following scenarios are possible after the parties obtain an arbitration award or reach a settlement before it.

Voluntary enforcement of an award or a settlement means that the party losing the dispute regarding a given claim behaves following the content of the arbitrators’ judgment or settlement concluded before them. It is irrelevant whether the settlement was given the form of a judgment or not.

Compulsory enforcement of a judgment or settlement in the form of a judgment is its sanctioning (approval) by the state court. In the Polish context, we are talking about the recognition of the judgment (when the claim established therein is not subject to enforcement) or declaration of enforceability (when the judgment/settlement is suitable for enforcement—in practice by a bailiff).

Challenging an arbitration award may include, an annulment, amendment, declaration of invalidity, determination that the judgment does not cause specific legal effects, etc.

Practical remarks

Each of the scenarios presented is regulated by national rules on arbitration. The statute is always of key importance (the rules of permanent arbitration courts do not generally regulate the issue of forcing the losing party to comply with the award or the method of challenging an arbitration award). It is the national law that regulates the cases of refusal of recognition/declaration of enforceability.

Procedures leading to (1) compulsory enforcement of an arbitration award/agreement or (2) challenging the arbitrators’ award are regulated by statute. It specifies the procedure, deadlines, and effects of procedural activities leading to the mentioned results.

The grounds for refusing recognition/declaration of enforceability are relatively narrowly defined and eventually lead to demonstrating what errors the arbitrators made in the award, not in the proceedings preceding its issuance. In most jurisdictions, recognition/declaration of enforceability of domestic and foreign judgments are governed separately.

Experience shows that refusal to recognize/declare such a judgment enforceable or its questioning (e.g. the annulment) happens extremely rarely.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.