For two years, new rules apply to proceedings at the ordinary courts, which make litigation a lot more difficult and formalised. As a result, lawyers are increasingly confronted with the question of whether the arbitration court or the ordinary court is more appropriate for ruling on any potential disputes. Of course, the time-worn answer is: it depends… But on what?
What’s the difference?
Unless otherwise agreed, disputes arising from contracts are settled by the ordinary state-run courts, usually in multi-stage proceedings. This means that the losing party may appeal, and can even submit a request for a third-instance review of that decision, too.
The concept of arbitration arose from the idea that if economic operators are free to conclude contracts as they see fit, they should also be able to determine who will resolve their disputes and in what type of proceedings. Arbitration cannot usually be stipulated in the dealings of private individuals, but companies have a relatively free hand in doing so.
But what determines which of the two courts should be stipulated in a contract?
To sue or to be sued – that is the question
An important consideration when choosing between the two forms of proceedings is whether we’re likely to be the plaintiffs or the defendants in the eventual litigation.
With the new Code of Civil Procedure, ordinary-court proceedings have become extremely formalistic, with strict deadlines, substantive and formal conditions and certain “key terms” that are expected to be used in submissions. If the litigant fails to meet these requirements, or fails to do so within the appropriate time, he or she may be deprived of the opportunity to claim, request or prove something. This places a heavy burden on the plaintiff in particular, as it is generally the plaintiff who must come up with evidence in court actions.
By contrast, a case can be launched at an arbitration court with a simple complaint, with minimum formal requirements, and can later be extended or modified substantively in the course of the proceedings. It is, therefore, easier for a plaintiff to fight in an arbitration court.
Of course, when signing a contract, it can be difficult to predict whether we will be plaintiffs or defendants. However, there are certain likely scenarios. For example, an entrepreneur who has been hired to deliver a complex piece of work within a tight deadline, with penalties to be charged if he doesn’t, will be more likely to be a defendant in a subsequent lawsuit. On the other hand, if we act as the buyer in a sales contract, we will most likely be plaintiffs if there’s a dispute.
The cost factor
It’s common knowledge that at arbitration courts (especially at certain foreign arbitration courts), procedural costs tend to be higher than the fees charged by the ordinary courts. So, at first glance, it appears that pursuing claims through the arbitration court is costlier. That’s not necessarily the case, however.
The decision of the arbitration court is final; it cannot generally be appealed. This is not the case with the ordinary courts, where a case may be decided in anything up to a three-stage procedure. Aside from the fact that, in most cases, time and uncertainty can themselves be measured in money, there are also direct cost implications to this: the arbitration-court fee only needs to be paid once, whereas we may have to pay fees several times at the ordinary courts.
All this means that it is cheaper to sue for ten million forints at a Hungarian arbitration court than at an ordinary court; in fact, even for hundreds of millions, if we resort to all the legal remedies afforded by the ordinary courts. Once we get into the billions of forints, however, the arbitration court is clearly more expensive.
This is further compounded by the fact that the ordinary courts often order the loser to pay far less in litigation costs than the winner has spent on his lawyers – while the arbitration courts are more inclined to award the costs that have actually been incurred, commensurate with the market value of the object of the litigation. Of course, we’ll only really know if we’ve made the right choice once we’ve won.
Let’s make a conscious decision...
There are several other factors that influence which court we ultimately choose to go with. For example, there’s a difference between how enforceable the rulings of the different courts are abroad, and also in terms of whether foreign languages can be used in the courts. And last but not least, the choice will be influenced by our confidence in the various types of court, which is often influenced by very subjective factors such as our own limited experience or what we’ve heard from others. For this reason, therefore, as with the rest of the contract, it’s a good idea to consider the dispute resolution clause carefully, and to make a conscious decision about where we want to sue, should it come to that.