In Homer’s Odyssey, the monster Scylla lives on one rock of the strait and the monster Charybdis on the opposite rock. Charybdis sucks in seawater three times a day, then spits it out with a roar. In his attempt to escape Charybdis, Ulysses comes so close to Scylla that it swallows six of his companions.
It is like choosing between state courts and private arbitration: better to avoid both.
But disputes cannot always be avoided. That is why it is good to know which is the lesser of two evils and which is the best mechanism to include in your contracts. Here is a brief summary of the advantages and disadvantages of each system.
In arbitration, there is usually only one trial. The decision of the arbitral tribunal is in general binding and final, and not subject to review. In state courts, on the other hand, the appeal process can take months or even years.
But arbitration may also drag on for years, depending on the complexity of the case. Against this background, arbitral institutions have introduced rules for expedited procedures, which can be agreed upon by the parties. However, several procedural steps, such as the appointment of arbitrators, often depend on the parties’ willingness to participate. Arbitration proceedings may therefore be quicker than state court proceedings, but not always.
As a rule of thumb, for amounts in dispute of €100,000 or more, the court costs for two instances in Germany are similar to the costs of arbitration (for example: for an amount in dispute of €10 million, it is approximately €250,000). As state proceedings often involve two instances, the costs are similar. The parties can also reduce the costs of arbitration by agreeing on a sole arbitrator (instead of three arbitrators).
Particularly in contracts with an international element, one party is reluctant to submit to the decision-making power of state judges from the same country as the other party. An arbitral tribunal can be composed of arbitrators from different countries – no party enjoys a “home field advantage”.
Depending on the arbitration rules, the parties or the arbitral institution choose the arbitrators. The advantage is that specialists can be appointed to deal with matters such as international transactions or construction projects. An arbitrator does not have to be a lawyer; technical experts can also be appointed. In state courts, on the other hand, judges are often generalists with no specialist knowledge.
Arbitration can easily be conducted in English. This is an advantage in international business. German courts are not so flexible – with few exceptions, the language must be German.
State court proceedings are open to the public. Anyone can listen to the hearing. The judgement may also be published. The parties cannot change this.
In arbitration, however, the proceedings take place behind closed doors. Often the arbitration rules provide for confidentiality. Where this is not the case, the parties may agree on it.
Sometimes it is unclear whether company A or company B caused the damage, or both together. This is a common situation in construction projects. In state courts, it is easy to sue both in order to resolve the multi-party dispute efficiently in a single proceeding.
The arbitration system is different: no one can be dragged into private arbitration without their consent. Therefore, all parties must agree to arbitration and the joinder of disputes (preferably at the time the contract is concluded). Otherwise, there is a risk of parallel proceedings with double costs and different results.
Arbitral awards can be easily enforced abroad. The so-called New York Convention has been ratified by most states and leads to widespread recognition of arbitral awards.
For state judgments, this only applies within Europe; outside Europe, enforcement is often difficult.
In an international context, arbitration is a good option. Specialists from different countries can be chosen as arbitrators, the proceedings can be conducted in English and enforcement of the award abroad is usually not a problem.
However, if the context is national and confidentiality and specialisation are not so important, state courts are often a good choice.