When partners become rivals in the corporate framework


At the beginning of any “corporate adventure”, it is sometimes forgotten to define the framework for the solution of possible discrepancies between its different partners.  Therefore, even before starting, every partner should consider the possibility that the adventure may not progress along the right path and think about how to solve such a situation, just as we often ask ourselves when arriving at any hotel, cinema or restaurant: where is the emergency exit located?

 

Arbitration in the corporate framework

Let us think of the well-known conflicts within the corporate walls in commercial or civil companies, in which a disagreement arises, and a solution is required that “must be imposed” to the partners/administrators, as well as to the entity itself in an effective manner. In short, when a problem becomes entrenched in social governance and each party proposes a different solution.

 

Legal framework, limits, and practical aspects

If the path chosen is arbitration to resolve such differences between partners, the first step is to avail oneself of the legal channels provided for such situations. Thus, the applicable rules are to be found in Law 60/2003 of 23 December 2003 on Arbitration. Art 2 and Art 11 bis.

Before opting for arbitration, it is not necessary to detail the additional disadvantages of litigating in the Courts of Justice in times of mobility restrictions; nor does it seem difficult to highlight the health risks that, in some cases, (not in all), may involve going to a Court of law in person. Given the current situation we find ourselves in with the emergence of COVID-19, health reasons are important for choosing arbitration, but not the only or the most relevant.

Therefore, the best motivation for referring proceedings and disputes between shareholders/directors or between the company and its shareholders or participants to arbitration is a quick and well-founded response that does not exacerbate the differences between the parties.

We will now detail the basic motivation for arbitration within a company and we will give you some considerations.

Firstly, we will highlight the obvious, in which cases a conflict between shareholders can be resolved through arbitration; in which the general rule in matters of private law (civil/commercial) will lead us to Article 2 of the Arbitration Act (disputes on matters of free disposal are subject to arbitration in accordance with the law) and which disagreements can be settled through this channel in which the arbitration agreement is incorporated into the Articles of Association of the company. It is an appropriate step, but not the only one, as it can be established after a disagreement has arisen or when it its foreseen that it will arise.

The answer is obvious: Matters over which the parties have the power of disposal and which are framed in a statutory (or possible ex post) arbitration agreement.

We will then decide which type of arbitration we feel most comfortable in resolving our differences, opting either for an “ad hoc” arbitration or one “managed” by an entity dependent on a professional corporation, (professional association, Chamber of Commerce or similar).

The third question to which we must pay attention is to establish the number of arbitrators and rules of procedure; questions which, if an institutionalised arbitration has been chosen, will be given to us by the rules of the chosen institution. Some of these may also form part of the statutory agreement.

A simple tip is to avoid the need for a new inter partes agreement for the process to get underway, as it is often the case that the party to be considered occupies the position of the defendant and normally does not facilitate the formalisation of the arbitration agreement, let alone the development of the procedure.

 

How to choose the institution that will administer the arbitration process: selection criteria

In the case, almost always advisable, of going to an arbitration administration entity, this can be limited to “national” arbitration (i.e. without foreign or transnational elements), when choosing “where” to carry out the arbitration, there are many reasons to take into consideration, such as the prestige of the Institution or its arbitrators, the specialisation, the number of disputes handled, the timing in issuing its awards, or the way in which it is appointed and, if one is “cautious”, even the form and amount of the costs and fees of both the Institution and the arbitrators (on this point, let us not forget that arbitration can be resolved with greater speed, motivation and using the experts required based on the matter, but, in principle, it will have a higher cost than a trial before the Courts of Justice).

Regarding the economic cost of arbitration, we can only highlight that arbitrators receive fees for their work, according to their professional skills and experience and also to the economic interest of what is decided, and the frequency of having expert witnesses or translators, among others, should not be overlooked. In compensation, there is no solicitor, no court fees and no “multiple instances and appeals” as in the ordinary jurisdiction.

Sometimes the proximity or the headquarters of the arbitration is a positive factor, as well as previous experience with the Institution itself are added values when choosing the arbitration Institution. This is clearly a decision to be taken preferably before the conflict has arisen.

However, it should be borne in mind that if a clause has been incorporated in the Articles of Association, it is not unusual for both the Arbitration Institution and some other regulation which may govern it.

So let us be clear that the aim of submitting a dispute in the context of a commercial company to arbitration is not to save costs but to be “blessed” with a quick solution, founded in Law and which does not lead to the life of the company becoming entrenched.

Let us be aware that the choice of the arbitration institution must be well chosen and that, normally being very protective, the arbitrator resolves in a reasoned manner in law, and also the arbitration institutions themselves sometimes exercise an external and formal control so that the Awards deserve its name and resolve the disputes raised in a complete manner.

In short, it is advisable to avoid conflicts within the corporate framework, but if they are unavoidable, we can only hope that arbitration will allow us a less aggressive channel to obtain the best possible solution.