Arbitration or Court – Which Route Is More Suitable

Choosing between the courts and voluntary arbitration to resolve a dispute has a direct impact on the duration, cost, confidentiality and even the foreseeable outcome of a case. This choice must be weighed before the dispute arises, in particular when negotiating commercial contracts, and not only once the conflict is already under way. This article forms part of the Litigation area of Araújo & Associados.

What voluntary arbitration is

Voluntary arbitration is a means of resolving disputes in which, by the will of the parties, the decision is entrusted to one or more arbitrators – third parties independent of the parties – as an alternative to the courts. The regime is laid down in Law No. 63/2011 of 14 December (the Voluntary Arbitration Law), which closely follows the UNCITRAL Model Law on International Commercial Arbitration, and Portugal ratified, without reservations, the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which gives added certainty to those who choose Portugal as the seat of arbitration. Arbitration may be ad hoc, organised solely for the dispute in question, or institutional, conducted through a permanent arbitration centre – with centres in Portugal dedicated to different areas, such as commerce in general, construction or sport.

Arbitration agreement – arbitration clause and submission agreement

Recourse to arbitration always depends on an arbitration agreement between the parties, which may take two forms: the arbitration clause (cláusula compromissória), included in a contract before any dispute exists, by which the parties agree to submit to arbitration future and potential disputes that may arise from that contract; and the submission agreement (compromisso arbitral), concluded after a specific dispute already exists, by which the parties agree to submit it to arbitration. Including a well-drafted arbitration clause in commercial contracts, service contracts or contracts of another nature is often the most effective way of ensuring access to arbitration should a dispute arise in the future.

Advantages of arbitration over the ordinary courts

Choosing arbitration is, in certain contexts, advantageous for several reasons:

• Technical expertise – the parties can choose arbitrators with specific technical knowledge of the matter in dispute, which can be particularly relevant in technical or sector-specific disputes;
• Confidentiality – unlike proceedings in the ordinary courts, which are, as a rule, public, arbitral proceedings are subject to a duty of secrecy, which can be relevant for companies wishing to avoid public exposure of a dispute;
• Procedural flexibility – the parties have greater scope to define the applicable procedural rules, time limits and language of the proceedings, which is especially relevant in disputes with an international element;
• Equivalent enforceability – arbitral awards have the same enforceability as decisions of the courts of first instance, and non-compliance is subject to the same enforcement routes.

Limitations of arbitration

Arbitration also has limitations that should be weighed. In particular, the costs associated with arbitrators’ fees and the arbitration centre’s charges are, as a rule, much higher than court costs in lower-value disputes. In addition, not all matters are capable of being resolved by arbitration, with questions relating to rights that cannot be disposed of (direitos indisponíveis) being, as a rule, excluded. Moreover, the possibility of appealing an arbitral decision is, by default, more limited than in ordinary court proceedings, unless the parties agree otherwise or in cases where the law expressly provides for an appeal, as occurs in certain higher-value disputes arising from public contracts.

Enforceability and challenge of the arbitral award

An arbitral award has the same enforceability as a decision of a court of first instance. Challenging it does not, as a rule, follow the route of an ordinary appeal on the merits of the decision, but rather an application for annulment, admissible only on the grounds exhaustively set out in Article 46 of the Voluntary Arbitration Law such as, for example, the invalidity of the arbitration agreement, breach of fundamental principles of procedure, or the award ruling on a matter not covered by the arbitration agreement, with the party seeking annulment bearing the burden of proving that one of those grounds exists. If those grounds are not established, there is, in principle, no scope for the courts to review the merits of the arbitral decision.

When it makes sense to choose arbitration

The weighing of arbitration against the ordinary courts should take into account the nature and value of the dispute, the need for confidentiality, the existence of an international element, and the technical expertise required by the matter in dispute. In high-value commercial contracts, international contracts, or situations where confidentiality is particularly relevant, arbitration tends to be more advantageous; in disputes of lower value or complexity, the ordinary courts may be the most cost-efficient route. This analysis should be carried out case by case, ideally at the stage of negotiating the contract underlying the relationship between the parties.

Arbitration and other related matters

The choice of the most suitable procedural route also has an impact on the later stages of the dispute, in particular on any enforcement of the decision obtained, described in the article Enforcement of judgments in Portugal – how to recover what you are owed. In disputes with public bodies, arbitration also follows specific rules of its own, covered in the article Public disputes – administrative litigation in Portugal.

About Araújo & Associados

Established in 1980, with offices in Porto and Lisbon, Araújo & Associados provides legal advice on negotiating arbitration agreements and on representing clients in arbitral and court proceedings, in Portuguese, English, French, German and Spanish.

Frequently asked questions about arbitration and the courts