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Mārtiņš Mežinskis: Do we need to set up an Economic Court?

German-Baltic Chamber of Commerce in Estonia, Latvia, Lithuania (AHK) editorial Baltic Business Quarterly published an article by PRIMUS DERLING partner Mārtiņš Mežinskis on the ongoing discussion on the establishment of Economic Courts.

The rule of law has always been a topical issue in Latvia. The concept of the rule of law has been bandied around in the society, linking it to time limits for proceedings, the competence of judges, the efficiency of the court process and, as a consequence, public trust in the Latvian judicial system. Much has been done to reduce the length of proceedings and to increase public confidence. Much has also been achieved.

In order to strengthen the rule of law, the Minister for Justice has taken the initiative to set up an Economic Court. This initiative has triggered a public debate involving also the President. The initiative of the Minister for Justice and the discussion that has begun on the initiative are proof that we live in a democratic state governed by rule of law.

According to the information available on the website of the Ministry of Justice, the Economic Courts would have jurisdiction over commercial disputes, financial crime and corruption cases. Without knowing what the term ‘commercial disputes’ comprises, it is not possible to unequivocally assess the merits of the initiative, at least with regard to the resolution of civil, that is to say, commercial, disputes.

With regard to the proceedings of financial crime and corruption cases, one has to agree with the Council of Justice that the reasons for the problem outlined in the concept (court deadlines) are related to the quality of pre-trial investigation and prosecution, i.e., before the matter is brought before court. In addition, the problems identified in the concept are also linked to the length of pre-trial investigation of these offenses.

As a commercial law firm, our attention was attracted by the plan to set up a special court to hear commercial disputes. According to information provided by the Ministry of Justice, purpose and benefits of such newly created specialized court are that it will handle cases quickly, efficiently and with high quality, and will relieve the courts of general jurisdiction, as was the case with the specialized courts for annulment of decisions of the shareholders’ meeting of companies.

In the absence of a detailed justification for creating a new court and of understanding the term ‘commercial dispute’, the question arises whether enough has been done within the existing system to achieve the objectives that lie behind the creation of a new court.

First, we believe that the goal could be achieved if existing judges specialised in this particular type of matters and, if necessary, new judges were recruited.

Secondly, it seems the arbitration institute has been neglected. Creating trust in Latvian arbitration courts and raising their prestige both in Latvia and abroad would benefit everyone, including the Latvian judicial system, which would be relieved.

We have observed the need for a fast, efficient and impartial dispute resolution mechanism in our attorneys practice. Increasingly, businessmen choose to settle their disputes in foreign arbitration courts. In addition, the choice of referring a potential dispute to a foreign arbitral tribunal is made even in transactions involving only Latvian legal entities or individuals, without any international element in the particular transaction.

Latvian businessmen have identified opportunities to resolve disputes before foreign courts of arbitration and have recognized that such kind of dispute resolution is an effective remedy. The reason why Latvian businessmen are increasingly choosing to settle their disputes outside Latvia may be due to mistrust in Latvian courts of arbitration and the efficiency of Latvian courts of general jurisdiction. Although improvements have been made in recent years, the Latvian courts of arbitration and judicial system are unable to demonstrate adequate competition to foreign courts of arbitration that provide prompt, objective and effective resolution of disputes.

Unfortunately, the associations created by Latvian courts of arbitration for businessmen relate to lack of rule of law in Latvia. Latvian courts of arbitration are still associated with a particular counterparty’s “pocket arbitration court”, with some exceptions, of course.

It is fair to say that such associations can be understood. There is a disproportionate number of courts of arbitration in Latvia. Some time ago some reforms were made to the functioning of courts of arbitration, but this reform did not completely resolve the issue of trust. There are still more than 50 courts of arbitration in Latvia, while there is one in Estonia and five such courts in Lithuania.

The main benefits of referring a dispute to a foreign arbitral tribunal are the impartiality and speed of proceedings. The procedures for the election of arbitrators and their reputation and professionalism ensure impartiality, and the case is reviewed by internationally recognized experts in the field. Conversely, the speed of proceedings depends on the complexity of the case and the behavior of the parties. On average, it takes about a year and a half to resolve a dispute.

However, foreign arbitration proceedings are expensive if compared to courts of general jurisdiction or Latvian courts of arbitration. For example, if the amount of the claim is EUR 1,000,000, the foreign arbitral tribunal and the three arbitrators will be reimbursed approximately EUR 49,000. In comparison, the stamp duty for bringing an action before a court of general jurisdiction in Latvia is approximately EUR 10,000.

On the one hand, high costs may make litigants question whether settling disputes is not too expensive and burdensome, but on the other hand, the relatively high costs of litigation can discourage unreasonable claims.

Even if the claimant, for reasons of his own, chooses to file an unfounded claim, such a decision will be very costly. In our practice, we have been faced with manifestly unfounded claims before a foreign arbitral tribunal, and the claimant had to pay more than EUR 400,000.

Given the demand for a fast, objective and relatively low cost dispute resolution mechanism, there is much to be done in this respect in Latvia within the already existing system.

We believe that it is necessary to work on the reform of courts of arbitration with the aim of purging the system from “pocket arbitration courts “, thus developing the arbitration process in Latvia. By developing the arbitration process, Latvia could become the centre of arbitration in the Baltic countries. This would undoubtedly create more confidence among foreign investors and would increase interest in investing in Latvia. Trust in arbitration would facilitate referral to arbitration, relieving courts of general jurisdiction.

We are convinced that it is possible to carry out a qualitative arbitration reform because there are enough internationally recognized arbitration professionals from Latvia who would not refuse to advise on the conduct of arbitration in Latvia.