Arbitration is a private dispute resolution mechanism created outside of the formal state judicial system. In the arbitration process, one or more arbitrators are selected by the disputing parties to hear the case and issue an award. Arbitrators act based on the powers and duties defined in the arbitration agreement or arbitration clause embedded in the main contract. While arbitration functions independently, it operates within the framework of the law and remains under the supervisory authority of the public judiciary. Once an enforcement order is issued by the court, the arbitrator’s award is executed by the court’s enforcement office.

The arbitrator plays a role comparable to that of a judge. However, unlike judges who must meet formal legal qualifications and are employed by the government, arbitrators are not required to meet the personal or professional criteria applicable to judges and are not state employees. In fact, under Iran’s Code of Civil Procedure, judges and court employees are prohibited from serving as arbitrators. Despite fundamental differences between judges and arbitrators, the term “private judge” is often used to help illustrate the role of an arbitrator.

Although arbitration, mediation, and conciliation are all alternative dispute resolution (ADR) methods outside the official judicial system, they differ significantly in function and legal nature. These differences are addressed in other articles on this website.

Advantages of Arbitration

Arbitration is favored by merchants primarily due to the following advantages over litigation:

1. Speed of Proceedings:

   Judicial proceedings are often lengthy due to heavy caseloads and other procedural obstacles. In countries like Iran, a legal case may take several years to conclude from initiation to enforcement. Arbitration, by contrast, allows the arbitrator to focus solely on the specific dispute and render an award in a timely manner. This expedited process is especially critical in commercial matters, making arbitration the preferred method for resolving business disputes globally.

2. Cost-Effectiveness:

   Court litigation generally involves high official costs, including court fees, expert witness fees, and enforcement expenses. This is particularly burdensome in corporate and commercial disputes, where claims of financial hardship (insolvency) are typically not accepted. In arbitration, only the arbitrator’s fee must be paid, which is either mutually agreed upon by the parties or determined according to an official tariff. In some instances, arbitrators may waive their fee altogether.

3. Precision and Expertise:

   Given the volume of cases in court, even highly capable judges may occasionally issue flawed rulings. An arbitrator, especially one who specializes in the subject matter and consults with an expert attorney, can deliver a fair, lawful, and technically accurate award. Where the arbitrator is a practicing lawyer, they are well-versed in applicable laws and may also solicit expert opinions. Additionally, arbitration often involves a panel of three arbitrators, which generally enhances the accuracy and fairness of the proceedings.

4. Judicial Oversight:

   While arbitrators issue awards independently, these awards must be confirmed by a court. If valid, the court will issue an enforcement order and the enforcement division will execute the award. If the arbitration process or award violates applicable law, exceeds the arbitrator’s authority, or breaches the arbitration agreement, the court may nullify the award. Hence, arbitrators do not wield absolute authority, and judicial oversight ensures the legitimacy and enforceability of the award.

5. Mutual Consent:

   Arbitration cannot commence without mutual agreement between the parties. It is the parties themselves who, seeking the benefits of arbitration over compulsory court litigation, authorize the arbitrator to resolve their dispute. They may also jointly dismiss the arbitrator during proceedings or renounce arbitration even after an award is issued. Such flexibility is not available in court proceedings. Furthermore, arbitrators are under no obligation to accept a case. If parties fail to agree on an arbitrator, they may petition the court to appoint one.

Disadvantages of Arbitration

Despite its many advantages, arbitration has some disadvantages that, while often negligible, merit attention. The most significant drawback is the potential lack of professional and ethical standards for arbitrators, compared to judges. Court judges are typically legal scholars, impartial, and subject to rigorous oversight by judicial and disciplinary bodies. In contrast, under Iranian law, an arbitrator may be an ordinary individual who is merely competent and of legal age, without any legal training. This lack of expertise may affect the quality of the award, and in some cases, arbitrators may be biased toward one party, resulting in unfair decisions that must be challenged and potentially annulled in court—an expensive and risky endeavor.

To mitigate this risk and take full advantage of arbitration, parties are advised to appoint arbitrators from among licensed attorneys. Such individuals are both knowledgeable in law and bound by the ethical code and oversight of bar associations, similar to judges. In modern commercial practice, this is the standard approach taken by most business professionals.

The Law Office and Legal Consultancy of Mr. Khademi, with over 20 years of experience in legal representation and arbitration—both as arbitrator and as counsel in arbitration proceedings—offers distinguished and effective expertise in commercial arbitration. In addition to holding a first-class license to practice law in Iran, Mr. Khademi is also a registered member of the International Bar Association. His legal consultancy firm in the Netherlands, AdvoLink, is fully equipped to handle arbitration matters in accordance with Dutch law. The next article will address the different forms of arbitration, including domestic and international commercial arbitration.