Arbitration is used for resolving disputes through judgment by a neutral arbitrator, instead of a judicial proceeding in court.
To bring a dispute between parties before an arbitrator, the parties must agree to do so in writing. Thus, there is an option to stipulate that in the event of a dispute, the parties will transfer the jurisdiction to an arbitrator who will resolve the conflict. At the end of the arbitration process, the arbitrator issues a decision, and the parties have the option to submit it to the court for approval. An arbitration decision that has been approved by the court has the same status as a court judgment. As a result, the remedies specified in it can be enforced through the Execution Office. The legal source is the Arbitration Law, 1968 (hereinafter: “the Law”), which regulates the legal framework for conducting an arbitration process. Section 1 of the Law provides the legal definition of the arbitration process: “A written agreement to refer a dispute that has arisen between the parties to an agreement, or that may arise between them in the future, to arbitration, whether or not the name of the arbitrator is specified in the agreement.”
The process length
The arbitration process offers several advantages over a regular legal proceeding. The first of these is a shorter duration than a regular legal process. This is partly because there is no legal requirement to conduct it according to procedural laws or rules of evidence that are mandated by law in courts, but rather according to substantive law. Moreover, a legal proceeding may drag on for many years without a clear decision. In contrast, according to the Arbitration Law, the arbitrator must make a decision within three months, unless the arbitrator has requested to extend this period by an additional three months. It is important to remember that in order for the arbitration decision to attain the status of a court judgment, the parties must submit the arbitration decision for approval by a court.
The costs
Another advantage of arbitration decisions is undoubtedly the lower costs compared to a legal proceeding in court. When a person files a claim in court, the plaintiff must pay the court fee, which is derived from the requested relief and the amount of the claim. In arbitration, there are no court fees, but both parties bear the cost of the arbitrator’s fee. The amount of the arbitrator’s fee is determined according to the number of sessions and the complexity of the dispute.
The efficiency of the arbitration process
In civil law applies the procedural and evidence rules that have been in place for decades, aimed at making the legal process structured and orderly. As a result of this structure, the legal process is very bureaucratic and sometimes it’s difficult to focus solely on the substantive issues of the specific lawsuit. Conversely, in the arbitration process, there is no legal obligation to adhere to the procedural and evidence laws of civil law. Furthermore, the Arbitration Law allows the parties to determine that the arbitrator will not be bound by the civil law’s evidence and procedural rules. This process can be lengthy since one of the parties not satisfied with the arbitrator’s decision may request its annulment before court approval is obtained.
Annulment of an arbitration
This decision is a rare step and is taken only in exceptional cases. The list of cases in which an annulment ground for an arbitration decision exists is set out in section 24 of the Arbitration Law – 1968. This section lists the reasons for which an arbitration decision can be annulled. This is a closed list, and the grounds are as follows:
24(1) – Annuls when there was no valid arbitration agreement. In cases where there is no arbitration agreement as required by law, this procedure is not permissible.
24(2) – Applies in cases where the arbitrator was appointed unlawfully because the conditions for their appointment were not met.
24(3) – The arbitrator acted without authority or exceeded the powers granted to them in the arbitration agreement.
24(4) – The reason for annulment exists when a litigant did not receive a fair opportunity to present their claims or evidence.
24(5) – When the arbitrator did not decide on one of the issues specified in the arbitration agreement.
24(6) – The ground for annulment exists when the arbitration agreement contains a condition instructing the arbitrator to explain their decisions, and they did not do so.
24(7) – Establishes a ground for annulment when the arbitration agreement specifies that the arbitrator must rule according to the law, and they did not do so.
24(8) – A ground arises under this section when the period allocated for issuing the arbitration decision has passed, and it has not been given.
24(9) – This section establishes a ground for annulment when the content of the arbitration decision contradicts public policy.
24(10) – Establishes a ground for annulment when principles of natural justice are violated or when new facts that were not known to the parties or either of them beforehand were discovered.
Tax implications need to be considered in the arbitration process
Parties to an arbitration process tend to forget that alongside the gain or loss in the arbitration process, there are tax implications that need to be considered. These implications could be the difference between a marginal tax on the winnings, sometimes exceeding 60% (plus additional tax, national insurance, etc.), versus proper tax planning that leads to an appropriate division of the winnings among the heads of damage, resulting in lower tax.
The differences between a win where the tax was properly planned and an arbitration process without proper tax planning can sometimes amount to 30% of the winnings.
It is important to consult with a tax expert from the stage of referring to an arbitrator and formulating the statement of claim, as the wording can significantly affect the tax assessment in this case.
Additionally, correctly dividing the claim into heads of damage from the outset is very important. This division sometimes requires economic work to be performed by an expert economist.
Even if a judgment has already been given, it is advisable to consult with a tax expert to examine the tax classification in a way that will save tax before an assessment is given. Our office’s tax experts, including accountants, lawyers, economists, and more, are very experienced in accompanying arbitration processes and assisting lawyers with tax matters.
From the initial consultation to obtaining tax withholding approvals from the tax authority, formulating opinions on the correct taxation method, and managing proceedings against the tax authority to reduce the tax to be paid, our office has extensive experience in accompanying arbitration processes (in terms of tax planning) from the stage of formulating the arbitration clause in the agreement to accompanying the arbitration process and using the arbitration decision to achieve tax relief.
