ARBITRATION IN HUNGARY - PROS AND CONS

24 November 2015

Arbitration is more and more popular way of settling business disputes worldwide, and in the past few years Hungary follows the same trend. In this article we summarize the pros and cons of arbitration in Hungary as compared to the litigation before state courts.

Length of the procedure

Disputes which are taken to arbitration can be resolved faster than a lawsuit in a state court. The rules of most arbitration institutions set out that proceedings should be finished within six months. The general experience in Hungary shows that proceedings are usually closed in a year before an arbitration court, while a litigation before the state courts usually takes 2-5 years.

The fact that arbitration awards cannot be appealed and they may be challenged before the state court on very limited grounds, also shortens the length of the procedure, in comparison with cases before ordinary courts, where even 3 court levels can be involved.

While the lack of appeal is an advantage when considering the time factor, it may be a disadvantage if the arbitral tribunal makes an unfavourable decision, without making a really serious procedural mistake. In this case the wrong deliberation of facts, or erroneous application of a legal provision in itself cannot lead to the annulment of the award, as it could be the case in case of litigation.

The opportunity to appoint the arbitrators

In case of arbitration the parties have the opportunity to appoint the arbitrators, while the state courts have system for random distribution of cases and the parties cannot affect the composition of the judicial tribunal.

Because of the variability of the disputes judges have to decide, they will often know very little about certain types of cases and this will often make it difficult for the attorney to effectively present the case.

Arbitrators on the other hand are usually attorneys who practice in a certain area or industry professionals who are very familiar with that certain domain. This can be a great advantage in complex cases.

Confidentiality

Often mentioned advantage of the arbitration procedures is that they are conducted behind closed doors.

While the litigation procedures are open for the publicity, in arbitration procedures third parties may attend hearings only if the parties and the tribunal allows. Experience shows that the strict confidentiality of arbitration avoids the escalation of the dispute of the parties and helps the amicable business-like dispute settlement.

The procedural rules

While in Hungary the language of the civil (litigation) procedure is Hungarian and the state court shall follow the Civil Procedure Code, in arbitration agreements parties can freely determine the language and rules of the procedure.

It is a great benefit for the party if he is familiar with the language of the procedure. Furthermore, by choosing the language parties can avoid additional costs (translation of documents, costs of interpreters) which shall be calculated in a litigation procedure before ordinary courts.

While the strict rules of the litigation before state courts often lengthen the procedure, in case of arbitration the procedural rules are much more flexible so the tribunal has wide discretion to govern the hearings within the framework of the agreed procedural rules.

Costs

The relatively high costs of arbitration are often referred to as a key disadvantage.

This opinion is definitely true in disputes involving smaller amounts. For example, in a case before the Court of Arbitration attached to the Hungarian Chamber of Commerce the minimum arbitration fee is around HUF 250.000 in case of a 3-arbitral tribunal, while the court duty of the same case before a state court is only HUF 15.000.

Disputes involving higher amounts can be also expensive in arbitration, because the arbitration fee increases proportionally with the disputed amount, but it is not maximized with a ceiling. In a business litigation before the state courts the court duty is 6% at first instance, 8% before the court of appeal and 10% in review procedure, but cannot exceed certain ceilings (HUF 1.500.000; HUF 2.500.000; and HUF 3.500.000 respectively).

On the other hand by reason of the usually shorter period and the one-instance system of the arbitration it will often end up being less expensive than a litigation procedure where the case moves through the whole court system.

For example a case involving HUF 50 Million will costs cca HUF 4 Million before the court of arbitration, while the court duty can be HUF 7,5 Million if all levels of state courts is involved in the dispute.

Moreover general experience shows that the arbitral tribunal is more generous in decisions about reimbursing the judicial costs of the winning party, so that the arbitration procedure can be cheaper for the winning party as the litigation procedure.