Arbitration clauses are easy to sign, but what happens when you cannot afford the costs?

Imagine two companies freely agreeing to submit any future dispute to arbitration. Years later, one of them faces severe financial difficulties. Its legal position has not changed. The contract has not changed. Only one thing has: it can no longer afford the arbitrators' fees, institutional costs and legal representation.

Should the arbitration agreement still be enforced?

The answer seems obvious. Contracts are meant to be honoured. If parties freely chose arbitration, they should be bound by that choice. But the issue is not that simple. If arbitration is the only agreed forum, insisting on the arbitration clause may leave an impecunious party with no realistic access to justice. Yet allowing the dispute to proceed before the state courts undermines the parties' agreement.

On the one hand, arbitration agreements are an expression of party autonomy and should generally be respected. On the other, the Portuguese Constitution guarantees that no one should be denied access to justice because of a lack of financial means. 

Unlike arbitration-friendly jurisdictions, such as the United Kingdom and France, the Portuguese Supreme Court has recognised that where a party’s financial incapacity is genuine and arises only after the arbitration agreement has been concluded, the inability to bear the costs of arbitration may prevent the arbitral proceedings from even commencing. In such exceptional circumstances, the Portuguese state courts may assume jurisdiction over the dispute.

Where a party relies on supervening impecuniosity, it must plead and prove its financial incapacity at the earliest procedural stage, whereupon the court must determine whether the arbitration agreement remains enforceable in the particular circumstances of the case.

This issue is no longer merely academic. In an increasingly volatile economic environment, companies may experience sudden financial distress long after signing an arbitration agreement. A dispute resolution mechanism chosen in times of prosperity may become inaccessible when it is needed most.

Perhaps the greatest irony is that a clause stipulated to ensure an efficient dispute resolution mechanism may, in exceptional circumstances, become the very obstacle preventing the dispute from being resolved.

The lesson is not that arbitration clauses should be avoided. Quite the opposite. They should simply be negotiated with a broader perspective, one that recognises not only the dispute that may arise, but also the possibility that a party's financial reality may change before that dispute is ever resolved.

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João Frias Costa is a lawyer and member of the Portuguese Bar Association, 1999. He is a partner at GPA - Gouveia Pereira & Associados, with a practice focused on dispute resolution, commercial and corporate law, insolvency and restructuring, and arbitration. 

Mariana Lopes Baptista is a trainee Lawyer at GPA - Gouveia Pereira & Associados, with a practice focused on dispute resolution, commercial and corporate law, insolvency and restructuring, and arbitration. She has a master's degree in Litigation.