Should SMEs Choose Arbitration to Resolve Disputes?

In the process of advising and handling disputes for Small and Medium Enterprises (“SMEs”), TNTP often receives questions such as “Should an arbitration clause be included in the contract?” or “When a dispute arises, should the court or arbitration be chosen?”. This is not only a legal technical issue but also a strategic decision that directly affects time, cost and the ability to recover debts. This article analyzes the issue from a practical perspective, from the viewpoint of SMEs, in order to help determine the appropriate approach when drafting contracts and when a dispute has already arisen.

1.Commercial arbitration and the conditions for applying commercial arbitration

Commercial arbitration is a method of dispute resolution outside the court, conducted based on the agreement of the parties. The prerequisite condition for choosing arbitration is that the contract must contain a valid arbitration clause or the parties reach a written agreement to use commercial arbitration as the method of dispute resolution after the dispute arises.

Unlike the court – where jurisdiction is established by law, arbitration only has jurisdiction when the parties agree. Therefore, if the contract does not contain an arbitration clause, the possibility of choosing this method after the dispute arises will depend on the goodwill of the other party. For SMEs, this has important implications from the contract drafting stage. Whether to include an arbitration clause in the contract needs to be carefully considered and should not be mechanically copied from contract templates.

2.Advantages of arbitration for SMEs

From practical experience, resolving disputes through arbitration has several advantages as follows:

• First, flexibility and speed: Arbitration procedures are often faster than court proceedings because they are not bound by multiple levels of adjudication. Arbitral awards are final and binding and are not subject to appeal under ordinary procedures. For SMEs that need to recover debts quickly in order to maintain cash flow, the time factor is a significant advantage.
• Second, confidentiality: Arbitration hearings are not public unless the parties agree otherwise. This is particularly suitable for enterprises that want to protect business information, brand reputation or avoid affecting relationships with other partners.
• Third, professional expertise: The parties have the right to choose arbitrators with expertise appropriate to the field of the dispute such as construction, finance, logistics or investment. For disputes with complex characteristics, this is an advantage in approaching and examining the nature of the matter in depth, clarifying the core factors leading to the dispute, thereby shortening the dispute resolution time and ensuring fairness and effectiveness.

3.Limitations and risks when SMEs choose arbitration

Before choosing arbitration to resolve disputes, SMEs need to consider several factors:

• Arbitration costs are often higher than court fees, especially in disputes with large values. For SMEs with limited financial resources, this is a factor that needs to be considered.
• In addition, although arbitral awards are final and binding, enforcement still depends on the civil judgment enforcement authority. If the losing party does not voluntarily comply and has no assets, compulsory enforcement is not significantly different from the enforcement of a court judgment.
• Furthermore, an arbitral award may be set aside in certain cases where the arbitration tribunal does not act within its jurisdiction, does not follow proper procedures or where the award violates the fundamental principles of Vietnamese law.

Therefore, when SMEs choose arbitration as the method for dispute resolution or debt recovery, consultation with or participation of a lawyer is necessary to ensure that the decision and choice of the enterprise is the most optimal option.

4.When should SMEs consider choosing arbitration?

The court has advantages in terms of cost and a clear enforcement mechanism. For small debts or simple disputes, the court may be a more economical option. However, the time required for resolution at the court is often prolonged due to the multi-level adjudication process. Appeals may delay the debt recovery process for an additional one to two years. For SMEs whose business operations depend on cash flow, such delays may seriously affect business activities.

Meanwhile, arbitration has the characteristics of speed and finality. When the dossier is complete and the evidence is clear, the time from filing the request to obtaining an award may be significantly shorter than at the court. Therefore, the choice of method should not be based on what is “commonly used” but should be based on the characteristics of the transaction, the contract value and the financial capacity of the enterprise.

From practical experience, SMEs should consider choosing arbitration in the following cases: contracts with large values; transactions involving deep technical elements; the partner is a foreign enterprise; the transaction takes place abroad; or the enterprise wishes to maintain confidentiality of information. Conversely, if the value of dispute is not large, the transaction relationship is simple and cost is the highest priority, the court may be more suitable.

5.Strategic considerations when drafting an arbitration clause

When drafting a contract, the decision of whether or not to include an arbitration clause should not be made out of habit or by copying from existing templates but should be considered within the overall risk management strategy of the enterprise.

If the enterprise wishes to choose arbitration, there must be a valid agreement established before or after the dispute arises. However, in practice, reaching such an agreement at the time of signing the contract always has an advantage because at that time the parties still have goodwill in cooperation. Enterprises should choose arbitration as the dispute resolution mechanism in transactions with large values, high confidentiality requirements or specific professional characteristics where the enterprise needs a dispute resolver who has deep understanding of technical, financial or construction fields. However, it should be noted that if there is a valid arbitration agreement, the court will refuse to accept the case, therefore the decision on which method to choose needs to be carefully considered from the beginning.

Regardless of which option is chosen, the drafting of the dispute resolution clause must be clear, strict and consistent with legal regulations. The participation of a lawyer from the contract drafting stage will help enterprises control risks, optimize dispute resolution strategies and best protect their rights and interests when issues arise.

The choice between arbitration and court does not have a common answer for all SMEs. Arbitration provides advantages in terms of speed, confidentiality and professional expertise but comes with higher costs. For SMEs, the decision should be made from the contract drafting stage, based on the assessment of risks, financial capacity and long-term business strategy. In the context where disputes are becoming increasingly complex, consulting a lawyer before signing a contract or immediately when a dispute arises will help enterprises choose an appropriate solution, control costs and maximize the possibility of debt recovery.