Arbitration: can it make sense for SMEs?

SME Publications/ SME XPO 2024

By Robert S. Pé, below, ICC Court member and independent arbitrator with Arbitration Chambers (Hong Kong, London and New York)

Peace is not the absence of conflict but the ability to cope with it – Mahatma Gandhi

Commercial disputes are an inevitable risk of doing business. An ability to resolve them can mean the difference between survival and failure, particularly for an SME. When a dispute arises, the focus will generally be on achieving a negotiated settlement, initially through direct negotiations and perhaps later with the involvement of a mediator. If such negotiations fail, then what next?  It has become increasingly common for contracts to stipulate arbitration, rather than Court litigation, as the ultimate method for resolving disputes. However, some SMEs seek to avoid arbitration, in the belief that it is designed primarily for large, multi-national businesses embroiled in high-value disputes. The aim of this article is to debunk that myth and to explain why, in the right case, any business, including an SME, can benefit from using arbitration.

Arbitration is a creature of contract and one of its overriding principles is respect for “party autonomy”. The parties themselves can agree in advance various aspects of how the arbitration will be run. For example, they can agree whether to have one or three arbitrators. They can agree to have a technical expert, rather than a lawyer, serve as arbitrator. They can agree that any arbitration will be handled based only on the documents and without the need for a hearing. Arbitration is a private process and confidentiality is often viewed as one of its cornerstones but, in many jurisdictions, the parties have some ability to stipulate whether, and the extent to which, any arbitration between them must be kept confidential.

Subject to demonstrating that authority has been properly delegated, the company’s officers can represent the company in an arbitration, rather than incur fees to external lawyers. Theoretically, that is also the case in many jurisdictions for court proceedings but the formality and fixed procedure of court proceedings can be off-putting. By contrast, arbitration is far less formal and the procedure is more flexible and so it can be easier and less intimidating for a company or individual to act in person. Of course, that is not to suggest that it is best to do so. The right legal team can add immense value in the right case but it is always important to ensure that legal fees are commensurate with the amount in dispute.

Unlike court litigation, which can involve multiple rounds of appeal, an arbitral award is final and the grounds for challenging it limited. Once an award has been communicated, it can be enforced in numerous different jurisdictions around the world. Over 170 countries have acceded to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. There are various treaties for mutual recognition and enforcement of Court judgments but none comes close to this number of signatories.

In most jurisdictions, the cost of running Courts is ultimately borne by the tax-payer. This means that, other than for limited filing fees, Courts do not generally charge for their services. By contrast, arbitral institutions charge administrative fees and arbitrators receive fees for their services and are reimbursed for legitimate expenses they incur. Parties have to bear these costs of arbitration, which can be off-putting. However, it is important to understand that competition is intense between arbitral institutions and between arbitrators and this serves to moderate such costs.

International Chamber of Commerce (ICC) arbitration is often viewed as the gold standard.  In 2023, the ICC’s Court of Arbitration is celebrating its centenary, having been established on 19 January 1923. The ICC has focused intensively on achieving time and cost efficiency of arbitration. The ICC’s administrative expenses and the arbitrators’ fees are fixed according to a scale of costs based on the monetary value of the claims. This system offers predictability for the parties, who can estimate the range of costs as soon as the value of the claim is known.

The ICC provides a costs calculator for this purpose. For a claim of US$100,000 resolved by one arbitrator, the indicative costs of arbitration are US$15,825. For a claim of US$1,000,000 resolved by one arbitrator, the indicative costs of arbitration are US$62,714. Where necessary, the ICC Court has discretion to fix the fees of the arbitrators at an amount higher or lower than that which is generated by the scales. There is also the possibility of expedited proceedings, which are suited to smaller value disputes. Under the scales for those, the average cost is even lower. For a claim of US$100,000 with one arbitrator, the indicative costs of expedited proceedings are US$13,813. For a claim of US$1,000,000 with one arbitrator, the indicative costs of expedited proceedings are US$ 54,838. It is important to understand that the costs of arbitration and the costs of expedited proceedings do not include lawyers’ fees and expenses, should a party choose to engage an external legal team.

Arbitration can be an efficient and cost-effective method for resolving commercial disputes. This is as much the case for an SME as for any other business. The key is to plan ahead and, where appropriate, to include in the contract a suitable arbitration provision.  Once a dispute has arisen, it may prove impossible for the parties to agree anything, including the method for resolving their dispute.

SME Publications/ SME XPO 2024