Why the market is favouring arbitration

Author: | Published: 1 Sep 2005
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Arbitration in Portugal is not a new field of law: the Arbitration Act dates from 1986 – although it has had some amendments – and arbitration proceedings were possible before then.

Despite being around for at least 20 years, the practice of arbitration has been limited for a number of reasons, such as a general suspicion about arbitration, the costs involved, and the fact that the Arbitration Act contained some provisions that could be used by a party less interested in starting litigation to freeze proceedings for years.

As to the general suspicion – although it is becoming less relevant, at least when compared with other criticisms that can be made of the state court system – it has several different causes.

In the Portuguese system there is not a tradition of conciliation. Almost all disputes go into litigation and settlements only are negotiated close to the stage of trial. No punitive damages are foreseen in the law and the defeated party will only bear a limited part of the legal costs of the counterparty, so litigation – considering the slow pace of Portuguese courts – frequently appears as an advantage.

This obstacle will always exist – at least until the law strongly penalizes the party that does not fulfil – but there is a growing conviction that disputes and litigation are disruptive and should be avoided or, when unavoidable, solved as swiftly as possible.

Arbitration, by nature and because of the proximity between the parties and the tribunal, tends to provide many more opportunities for informal conciliation. However, the pursuit of unanimous decisions by tribunals can provoke more balanced decisions, therefore harming the parties aiming for full conviction or acquittal.

Similarly, there is a belief (which still has several followers) that the parties' appointed arbitrators should be an extension of the parties' lawyers, which necessarily undermines their position before the president of the tribunal (who will, ultimately, render the decision). But parties (and their counsel) are becoming more convinced of the advantages of having a fully independent arbitral panel as the sole means of ensuring the effectiveness of arbitration.

Traditionally, there was also a high level of respect for the state courts, which has been progressively diminishing because of the slowness of the proceedings (a case might easily take five years to be decided) and the state courts' inability to deal with the demands of some types of modern litigation.

For example, in theory a judge may appoint an expert to assist in their decision. But the provisions of the law concerning the payment of such experts are so strict and limited that it is almost impossible to appoint top experts. Likewise, the law does not allow the possibility of having a team of experts and always looks at the expert as a single person.

A similar problem occurs with the non-specialization of the courts. The courts (at least in the big cities) specialize in broad areas of the law (such as family, crime, civil, labour, tax, and commerce), but no court is prepared to address, for example, a dispute concerning project finance or a dispute on the perfect fulfilment of a contract involving the procurement of a large industrial facility.

So, despite the reservations the market might still have concerning arbitration, it is slowly establishing itself as the main alternative dispute resolution method.

As to costs, state courts used to be substantially less costly than arbitration. However, the law on costs was changed recently and state court fees were increased, leading to a situation in which – especially in large disputes – the costs of arbitration could be similar to the fees charged by a state court.

Lastly, in the original version of the Portuguese Arbitration Act, the arbitral proceedings could only begin when the parties had agreed on the object of the dispute. This led to having parties systematically challenging the object of the dispute or simply stating that it was not acceptable. In those cases the object of the dispute would have to be established by a state court. Non-cooperative parties could, by forcing the recourse to courts, freeze arbitration for years.

This strange system was changed in 2003 and now, like in other systems, agreement is no longer necessary. Although the practitioners were developing remedies, this change clearly constitutes a step towards making arbitration a more secure alternative dispute resolution system.

The Portuguese Arbitration Act is far from perfect and could benefit from some changes. But it is a valid tool and provides almost complete freedom to arbitrators in defining the applicable rules and/or allows the application of international regulations. This means that, despite some local eccentricities, the Portuguese Law regulates and accepts arbitration in similar terms to what happens with other modern laws.

Regarding commercial disputes – excluding conflicts regarding consumer protection and similar small disputes – from a moment it was considered as an option for wealthy parties and multinational companies, arbitration has become an increasingly popular method of solving conflicts. And the inefficiency of the Portuguese court system is not the only reason for this increased popularity: arbitration clauses are often included in contracts involving foreign parties (due to the foreign party's lack of trust of the counterparty's jurisdiction) and in national contracts where it is expected that, due to the complexity of future disputes or the values involved, the matter would be better decided if analysed by a specialist panel.

The government has made a big step towards the acceptance of arbitration as an effective dispute resolution method – a number of major contracts it entered into in recent years included arbitration clauses.

As to advantages, it is generally accepted that arbitration is faster and more efficient. Secrecy of the proceedings is also an advantage, together with the possibility of choosing the arbitrators and the possibility of adapting the procedural rules to the particulars of the case.

This does not mean that in judicial courts parties are condemned to have bad decisions: however, court judges often have to analyse hundreds (and in some cases thousands) of cases running simultaneously, without easy access to technology, expert support and, sometimes, even court rooms for trials.

The Portuguese Arbitration Act – present status

Despite the presence of national arbitration centres and the acceptance of rules of international centres (such as ICC, LCIA, and Uncitral), most arbitration proceedings in Portugal are ad hoc proceedings conducted according to the Portuguese Arbitration Act: Law 31/86 of August 29, with the modifications introduced through Decree-Law 38/2003 of March 8.

This Act only provides general guidelines and, concerning procedural rules, leaves almost absolute freedom to the Tribunal (and the parties) to define the applicable rules. A number of general principles have to be respected, most of them common to the New York Convention of 1958.

The party that wishes to submit the dispute to the Arbitral Tribunal must notify the other party by mail, referring to the arbitration agreement and stating the nature of the dispute, if this has not already been established in the agreement. If the parties wish to appoint one or more arbitrators, this notification must contain their identification, as well as an invitation for the other party to appoint the arbitrators it chooses. No pleadings should be prepared at this stage.

The arbitral tribunal may be composed of one or more arbitrators, in accordance with the agreement, but there must always be an odd number. The same principles of judges' exemption and incapacities apply to arbitrators. If the parties cannot agree on the appointment of the arbitrators, the appointment will be requested to the appeal court at the seat of the arbitration. The most common procedure, and one that generally gives the best results, is that each party appoints an arbitrator and the two arbitrators thus appointed agree on a third member to preside the arbitral tribunal.

Once arbitration has commenced, with the written notification, the proceedings must be conducted according to a few fundamental principles, which if breached can set the grounds for the nullity of the arbitral award: (i) the defendant will be summoned to present their defence; (ii) the adversarial principle will be observed at all stages of the proceeding; (iii) both parties will be heard, orally or in writing, before the final arbitral award is issued.

Notwithstanding the legal framework, there is a tendency to follow the civil procedural law applicable in national courts, which sometimes brings some stiffness to the proceedings. Despite that, arbitration still constitutes an effective dispute resolution method, with a wide range of advantages over national courts.

The parties are free to grant the tribunal the power to decide ex aequo et bono or to establish that the award will be rendered according to the strict applicable law. Regardless of that choice, it is not uncommon to see an arbitration panel acting as amicable compositeur, which again appears as an advantage to national courts, where normally conciliation is no more than a mere formality.

If nothing is agreed by the parties, the law establishes that the award will have to be rendered six months after the constitution of the Tribunal. This time limit can only be extended by mutual agreement of the parties, which can be a problem, as experience shows that fast-track arbitrations are difficult to deal with. Therefore it is advisable that the parties, when drafting the arbitral clause, foresee remedies to situations such as these.

As to the effects of the decisions rendered, the law states that domestic arbitration awards have the same value as national court decisions and awards rendered abroad will be accepted in terms close to the ones applicable to judgments given by foreign courts. Portugal is a signatory state of the New York Convention of 1958 regarding the recognition and enforcement of arbitral awards.

The parties are free to waive the right to appeal, which does not prevent them from challenging the award. However, and as in most European legal systems, the grounds for a request to set aside an award are limited and filing such a request will not suspend the enforcement of the award.

Portuguese law makes a distinction between domestic and international arbitration, although in practical terms the consequences of the distinction are few. Article 32 of the Arbitration Act defines international arbitration as an arbitration in which international trade interests are at stake. This definition is less than satisfactory because it is not always clear what these interests are. In a more pragmatic and necessarily simplistic manner, international arbitration is that which has an international element, usually parties with different nationalities.

In the scope of international arbitration, the differences between court proceedings and arbitral ones, which are generally related to formalities, become even more evident than in domestic arbitration. The prevailing influences of international arbitration are the ideas of flexibility and the purpose of the proceedings.

Mainly due to the greater flexibility, arbitrators play a more active role both in directing the dispute and in its outcome, which has contributed to the rise of this form of justice as an independent means of international dispute resolution. Additionally, the fact that international arbitration is not as fettered by the legal concepts of a given country or legal system as is state justice makes it an ideal instrument to settle disputes that have an international slant.

International sets of rules (such as the ones from ICC) are well accepted in Portugal, and Portuguese practitioners are familiar with awards rendered abroad, and with the doctrine produced in the past decades. Consequently, the local approach to international arbitration tends to be similar to most of the legal systems in Europe.

In international arbitration seated in Portugal, the set of principles mentioned above have also to be fully complied with. Consequently it is of the utmost importance that the parties be represented by lawyers who are familiar with this type of proceeding and the rules applicable, not only during or immediately before the dispute, but also in negotiating and drafting the arbitration clause.

Arbitration is the future

Portuguese judicial courts have been facing exceptional delays in the past 10 years, mainly due to the exponential increase in the number of claims filed. Many changes in the procedural law have been introduced recently but their practical effects are yet to be seen. Although the civil procedure has been greatly improved, the shortage of immediate results has contributed to the growth of the arbitration and mediation fields.

No dispute resolution method is perfect and there will always be criticisms about arbitration. However, and after considering the situation of national courts and the tight legal framework that applies to the development of proceedings in such courts, there can be no hesitation in recommending arbitration as an alternative dispute resolution method.

This acceptance of arbitration is further confirmed in day-to-day practice, where more and more new contracts include, ab initio, arbitration clauses. In the future, and at least when the matters under dispute are complex, arbitration will stand side by side with national courts as the favoured dispute resolution method.

Arbitration should be strongly considered whenever is possible to anticipate that a future dispute will arise and will assume a complex nature. Ironically, a judge, despite having all the support of the legal machine, will normally decide alone; an arbitrator, without any structure to rely on, will be free to make use of many more resources.

Taking into account the sophistication of some modern disputes, arbitration is – at least for now – the best answer the legal system can provide.

Author biographies

Pedro Metello de Nápoles

PLMJ

Pedro Metello de Nápoles' main practice areas are litigation and arbitration.

Metello de Nápoles holds a law degree from the Portuguese Catholic University Law School, Lisbon (1995). He was admitted to the Portuguese Bar Association in 1997.

Metello de Nápoles' speaks Portuguese and English.


Inês Gomes da Cruz

PLMJ

Inês Gomes da Cruz practises litigation and arbitration.

She graduated from Lusíada University Law School in 1996 and was admitted to the Portuguese Bar Association in 1998.

She speaks Portuguese, English, and French.