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Serbia: Arbitration – Justified Fear of Cost or Unjustified Lack of Understanding of Cost?

Serbia: Arbitration – Justified Fear of Cost or Unjustified Lack of Understanding of Cost?

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When it comes to resolving disputes between contracting parties, the threat, “I’ll see you in court!” often is the first thing to cross peoples’ minds. This call to arms is still common, despite the availability now of different dispute resolution methods, such as arbitration.

Over the last several years, arbitration has become increasingly popular in the SEE region, primarily in more complex commercial agreements, although clients are still trying to fully understand its benefits, which usually include being faster and less expensive than the courts.

Unfortunately, many clients do not pay sufficient attention to the advantages and disadvantages of arbitration, as many of them, especially those considering international arbitration, are put off by one thing – the cost.

In principle, the costs of arbitration include attorney fees, procedural costs (such as registration fees, administrative costs, and arbitrators’ fees) and additional expenses (such as translation, travel, and so on). While procedural costs and additional expenses can be predicted to some extent, the biggest chunk of the costs are usually the attorney fees, as the tribunal and institution fees may account for as little as 10% to 15% of the parties’ legal costs.

In addition, apart from the (more or less) transparent costs, there are hidden costs, such as the opportunity cost of the dispute (that is, the lost use of the financial resources that remain idle during the dispute). In addition, there are also the costs of internal resources (such as in-house counsels, etc.) and the costs of reservation of funds in case of loss.

Last but not least, although time is money, the loss of time is another real cost of a dispute.

These costs have been a legitimate concern for clients in international and domestic disputes as, at first glance, arbitration indeed looks costlier, especially when dealing with complex and high-value cases with cross-border elements. However, in a real and complete comparison between arbitration and traditional litigation, it does not tell the whole story.

At first glance, the domestic courts might seem cheaper and (sometimes) faster. However, although in Serbia the backlog of old cases is decreasing, in 2018 there were 1.7 million court cases pending, nearly 200,000 of which have been pending for more than a decade. Although not all these cases are commercial and complex disputes, the ability of the court to properly and timely handle new cases is certainly endangered with the existing backlog.

The only proper response of clients to observations that justice in Serbia is too slow is that justice delayed is justice denied. Indeed, this is especially true when justice does not even have a place to arrive, when either the plaintiff or the respondent faces financial difficulties or even bankruptcy before justice finally shows up! In addition, even after the court has issued final and binding judgement, enforcement can be problematic (e.g., despite the strong ties between Serbia and Austria, there is no reciprocity regarding recognition of commercial court decisions).

By contrast, local Serbian arbitration institutions, such as Permanent Arbitration at the Chamber of Commerce and Industry of Serbia and Belgrade Arbitration Center (BAC) have established that, as a rule, arbitral proceedings shall be completed within six months from the date of constitution of the arbitral tribunal or appointment of the sole arbitrator.

In addition, unlike with court judgements, enforcement of foreign arbitral awards is greatly facilitated by the New York Convention, of which Serbia is a signatory.

The question remains whether the fear of arbitration costs is justified.

The most popular response given by any lawyer is that it depends on the case.  If a company is looking not only at real costs but also at hidden costs, values its time and recognizes the opportunity costs of the dispute, and is ready to preserve its resources especially in complex cases, it should stay away from the seemingly cheaper alternative of traditional litigation, which often proves to be significantly more expensive at the end.

If a company believes that arbitration is too expensive for handling its high value dispute – it should try the courts.

By Nedeljko Velisavljevic, Partner, and Nenad Kovacevic, Attorney at Law, CMS Belgrade

This Article was originally published in Issue 7.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

 

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