How to compare costs in order to make the best choice

The high costs possibly involved in an arbitration procedure may be an obstacle when the parties discuss the inclusion of an arbitration clause in the agreement. A research by the Brazilian Arbitration Committee has tried to find out if several users identify the existence of disadvantages in this dispute resolution method when compared to the judicial procedure. Among those who affirmed to have identified inconveniences, the cost was mentioned as the most significant one.

This high cost derives mostly from administration and arbitrators’ fees charged by the arbitration centers and from the arbitrators’ fees – both vary according to the complexity and duration of the case.

The amount to be paid as compensation to the arbitration chambers is determined by the institutions, according to certain criteria such as amount involved in the litigation, number of working hours, duration of the procedure and number of arbitrators. Typically, the arbitration chambers offer price lists and cost calculators on their website, which makes it easier to compare among the several arbitration institutions.

There is no state regulation or cap to determine the arbitrators’ fees, and they may be negotiated with the parties (usually in cases of ad hoc arbitration) or defined according to the price ranges informed by the arbitration chambers.

To explain the magnitude of these amounts, consider a case with ten million Brazilian Reais as amount involved, to be decided by three arbitrators. If this case is administrated by the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada, each party must pay approximately two hundred and ninety thousand Brazilian Reais as administration and arbitrators’ fees. If this case is administrated by the International Chamber of Commerce, the total average cost for each party is of approximately four hundred thousand Brazilian Reais. It is important to emphasize that these amounts may be recovered by the winning party, depending on how the arbitration clause deals with the matter. These are not insignificant amounts, however if the dispute is submitted to the Judiciary, it would require the plaintiff to pay approximately one hundred and fifty thousand Brazilian Reais for initial costs and appeal.

In cases of disputes involving an international element, it is also important to compare the costs of filing action in other jurisdictions – which may be even more significant, as for example in the jurisdiction of the United States.

In addition to the financial cost, the parties must consider the cost of opportunity related to each dispute resolution method. This analysis must consider the average time spent in obtaining a definitive solution to the dispute.

According to a research by the National Council of Justice, the state courts take on average four and a half years to render a judgment, and said judgment would still be subject to several appeals. On the other hand, according to the arbitration chambers’ statistics, solving the dispute through arbitration takes on average twelve to eighteen months. Moreover, it is important to bear in mind that the arbitration award is unappealable (except for the possibility of annulment, which has a limited scope).

Hence, the solution derived from the arbitration procedure, in addition to being significantly faster, may have positive financial repercussions, once the situation of uncertainty ends quicker.

In order to determine the convenience of including an arbitration clause, it is necessary to analyze the costs of the arbitration and the importance of the dispute to the business of parties, considering the impact of the delay in solving the dispute, the complexity of the matter, the amount involved and the level of confidentiality.  However, despite the advantages of the arbitration procedure, investing resources to pay the costs and expenses involved may be impossible or not strategically interesting to a party. In this case, third parties financing has been increasing, as we will see in the next article.

By Vamilson José Costa, Maria Cibele Crepaldi Affonso dos Santos and Marina Santos Fusinato

O Costa Tavares Paes Advogados nasceu em 2010 e conta com escritórios em São Paulo, Rio de Janeiro e Brasília. Saiba mais sobre a banca e nossos serviços.