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A modest proposal

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27-09-2013

Companies would be more eager to use arbitration if the total cost were more predictable

When starting a new investment or entering into a new agreement, we rarely think about the potential disputes that may arise from their performance. If already at the beginning of cooperation with a new counterparty one were to assume that it would lead to a meeting of the parties in the courtroom, the very purpose of starting the cooperation would become questionable.

However, practice shows that to avoid litigation in daily business operations is simply impossible. In this situation, it is good to determine in advance the principles for resolving potential future disputes. One of the key decisions to be made in this regard when negotiating a new agreement is to determine whether disputes that may arise out of the agreement in the future will be settled by a court of law or an arbitral tribunal. It is impossible in a relatively short text to make an exhaustive description of all the pros and cons of including an arbitration clause in an agreement. However, the parties will usually ask themselves first about the costs associated with the given type of proceedings.

The cost problem should be considered in light of the advantages offered by arbitration: It is substantially better in the quality of the decision-making; the parties have their say on the choice of arbitrators who are experienced in resolving disputes of a particular character; and the overall process offers a more time-efficient adjudication as compared to regular courts. It is difficult however for a party to rationally and consciously assess whether the price it will have to pay for these benefits is justified. For managers, it would be valuable to increase the predictability of the costs of arbitration proceedings, in order to eliminate this clear disadvantage compared with traditional court proceedings.

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Source: Małgorzata Modzelewska de Raad, Stanisław Żemojetl, American Investor, Summer 2013

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